Our insured is a support organization for a local university. One of their major sources of income is a campground that is manned by employees during the summer months. One employee stole $22,000 in cash and $31,000 in checks. Since the annual income from this camp is over $200,000, the loss was not discovered until the end of the season, and then another couple of months passed in order to determine the extent of damage. The employee did admit the theft and turned over the checks that she still had in her possession.

The insured carries a commercial crime policy that includes coverage for employee dishonesty. The insurer has agreed to pay the cash loss but has denied coverage for the loss of some of the checks. The checks were deposited after the employee returned them, but some have not been honored due to the length of time involved from the writing of the check to the cashing of the check. The insurer says that the inability to collect on the checks is now a bad debt and so, it is not covered because it is an indirect loss.

What is your opinion of this situation?

California Subscriber

The insurer has a very interesting interpretation of the indirect loss exclusion on the commercial crime coverage form. It seems that the insurer is saying that this was an indirect loss in that it was an inability on the part of the insured to realize income that the insured would have realized had there been no theft. However, that is not what is meant by this exclusion. After all, if the employee had only stolen cash, that would also be an inability of the insured to realize income, and that would make the employee theft coverage an illusory coverage.

An example of what the indirect loss (or consequential loss) exclusion applies to is the following: the employee is carrying a huge amount of money to a business meeting to make a down payment on a contract that will result in the insured's company winning a bid to build a costly sports stadium. Along the way, the employee is held up and the money is taken. The employee goes to the meeting and explains the problem, but the delay in payment results in the insured's company losing the contract and the income that the stadium project would have brought to the insured. The loss of the money is a direct loss but the loss of income from loss of the contract is an indirect loss arising from the loss of the money. The loss of money is covered but the loss of income from the lost contract is not.

The fact is that the employee caused a direct loss of income to the insured by the theft. It makes no difference if the employee stole cash or checks—the loss of either is a direct loss to the insured. The theft was a close, causal, and straightforward event that caused the insured to lose money, both in cash and in check form. The insurer is misreading the exclusion in this instance.