We have a client who hired a payroll service to take care of issuing their payroll checks, filing taxes, issuing W-2s, etc. The payroll service apparently got into some financial trouble and began using clients' funds (tax dollars) to dig themselves out. Unfortunately, they couldn't rectify their financial matters and the company is now in bankruptcy. At the same time, the IRS notified our client of back taxes and penalties due because of the payroll service's failure to remit the tax dollars. Basically, the client is being asked to pay the taxes again along with a penalty for late filing.

With more and more clients using this type of service, it would be beneficial to know if there is such a crime coverage that would indemnify for this type of situation.

Minnesota Subscriber

The Surety Association of America governs the portion of the crime program applicable in this case—Form A, Employee Dishonesty. Endorsement CR 10 24, “Include Designated Agents as Employees Covered for 'Employee Dishonesty' Only,” may be attached to Form A to modify it so that this type of incident is covered. The endorsement modifies the definition of “employee” so that a “natural person, partnership or corporation [the named insured appoints] in writing to act as [the named insured's] agent in the capacity shown in the schedule while acting on [the named insured's] behalf while in possession of covered property.”

The payroll service would thus be an “employee;” and their dishonest act committed with the intent to “cause [the named insured] to sustain loss; and also obtain financial benefit” covered.