Honest Answers On Dishonesty Claims

Two weeks ago in an “FC&S On Lines” column (“Dishonesty Claim Questions On The Rise,” Jan. 14, page 23), FC&S Associate Editor Diana Reitz posited the question of whether the economy, changing market conditions, or “a freakish alignment of the stars” was responsible for the numerous questions the staff has received about employee dishonesty and theft coverage.

She did a dandy review of the changes from the penultimate to the most current crime coverage forms, and some of the issues arising from the change(s) in provisions. I dont know the answer to her question of why, but I do know we are getting a number of questions on crime coverage interpretation.

Nevertheless, the questions are real, give our readers headaches, and so in this edition of “The FC&S Answer” I thought wed share some of the questions being raised by those who are having to deal with them.

For example: “We have a client who owns a casino. A ‘patron’ [quotes added by the inquirer, possibly to get across the irony of the situation] deposited a check for $840,000 into his players account with the insured. The check was written on a third-partys personal account and was made payable to the patron.

“The insured placed a hold on the funds until the check cleared. The check writers bank advised the insured that the funds had cleared and the insured released the funds to the patron, who promptly left the casino. The insured was later advised by its own bank that the check was a forgery.

“The insured has Forgery or Alteration coverage under ISO form CR 00 03 (01 86). The carrier’s position is that there is no coverage because the check in question must be written on one of the insured’s accounts and not written on another party’s account.

“We disagree. The form does not specify that forged checks must be written on an insured’s account. In fact, under Covered Instruments, the form covers checks ‘made or drawn by or drawn upon you.’ Our position is that this language should cover checks written on third-party accounts and deposited with the insured, and that coverage should be afforded. Your thoughts would be appreciated.”

FC&S Staff Writer Susan Massmans thoughts probably were not appreciated by the agent who had to tell their client that a loss of more than three-quarters of a million dollars was not covered by this form. “You specify that your client is insured under form CR 00 03. That form specifies that covered instruments must be made or drawn by or upon the insured or on one acting as the insured’s agent, so the form does not provide coverage for your client’s situation.”

Another subscriber provided this scenario: “An insured overpaid a new employee in error. Rather than being paid his wages of $680, he was paid for 680 hours of work, resulting in a check for $11,000. When the error was discovered and the employee was asked to return the overpayment, he said hed already spent the money and would not be able to repay it.

“This [loss] has been submitted under the employee dishonesty policy, but there are concerns regarding clause (2), [which states the requirement that a employee must] obtain financial benefit other then employee benefits earned in the normal course of employment, including salary, commission, fees, bonuses, promotions, awards, and etc.

“The employee is alleging that he thought the money was a signing bonus. But there is no mention of a signing bonus in the employers acceptance-of-hire letter. Although the employee did not contribute to the initial error, was he not dishonest in not bringing the error to the employers attention upon receipt of the overpayment, and by not doing so created the manifest intent to cause financial harm to the employer? Do you see coverage?”

We do not. Assuming that coverage is written on CR 00 01, we do not believe the policy offers coverage for this type of situation because the $11,000 was paid as payroll. In addition, the employee did not act to cause the insured loss; a mistake was just made.

The courts that have ruled on this type of situation have been very explicit in stating that any benefit that takes the form of a normal type of compensation–even though unearned–is excluded from coverage. Therefore, even though the employee did not earn the $11,000 (in the old-fashioned way), it was paid to him as wages–which is a type of compensation normally earned in the course of employment.

Based on the fact that the $11,000 was received as salary, the loss is not covered by the standard employee dishonesty form (CR 00 01). The new employee theft form (CR 00 20) has dropped this wording, but that does not affect this claim, or others under the still-prevalent older version.

Incidentally, before case support had developed for this line of thought, the FC&S had stated that such losses should be covered, as fraudulently–criminally–increasing ones salary or commission could not be money earned in the normal course of business. This exact argument was put before courts and was not accepted. Almost invariably, courts have found no coverage in this type of situation.

(For support, see Hartford Accident & Indemnity Ins. Co. v. Washington National Ins. Co.; Benchmark Crafters, Inc. v. Northwestern National Ins. Co.; Berger v. Firemans American Loss Control Co.; and Auburn Ford Lincoln Mercury, Inc. v. Universal Underwriters Ins. Co).

Three more, quickly, followed by “The FC&S Answer.”

Issuing checks for painting the office without the insured company desiring the painting (a friend of the employee painted the office and received the payment).

The FC&S Answer: The definition of employee dishonesty on CR 00 01 requires that the employee in question act to cause the employer to sustain loss. If the office truly was painted, it does not appear that the insured business actually sustained a loss. Painting was obtained for the money paid–despite the fact that the insured might not have affirmatively elected to have the painting done.

Falsifying student applications for scholarships. The insured company received the money but then had to reimburse the entity that awarded the scholarships because the applications were false.

The FC&S Answer: The definition of employee dishonesty on CR 00 01 requires, once again, that the employee act to cause the employer to sustain loss and also that the employee or another person or organization receive financial benefit from the employees action.

Even though the employer had to reimburse the granting entity for the scholarships, the employee in question did not financially benefit. It also appears that she did not falsify the applications in order for another person or organization to financially benefit.

An employee advancing herself salary increases.

The FC&S Answer: The employee did benefit financially from the salary increases. However, as we discussed before, the financial benefit must be other than benefits (including salary) earned in the normal course of employment. Since the salary she earned, even though higher than authorized, was earned in the normal course of employment, it does not appear that this requirement is met.

Bruce Hillman, JD, is Editorial Director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, in Erlanger, Ky. Questions and comment are invited at fcs@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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