Summary: Most homeowners forms in use today provide coverage for loss from credit card, counterfeit money, forgery, and fund transfer cards on standard homeowners policies. The Insurance Services Office homeowners forms afford $500 in coverage which may be increased by endorsement; other forms offer $1000 or more in coverage. This article discusses the need for credit card and forgery coverage and compares the coverages provided by the ISO and AAIS forms.
Topics covered:
Need for Credit Card Coverage
An amendment to the federal fair credit reporting act (often called the truth-in-lending law) sought to take most of the risk associated with lost or stolen credit cards off the holder and place it on the card issuer. Since the amendment went into effect, insurance producers and their clients have speculated about the need for continued credit card coverage.
The law places the burden of proof on the issuer of the card in any litigation designed to recover from the card holder charges made while the card is lost or stolen. That is, the issuer must prove that it had given the card holder “adequate notice of (the card holder's) loss potential,” that it had provided the holder with a pre-stamped mailer with which to send notification of a lost or stolen card, that it had provided the holder with a means of identification as the legitimate user of the card, and that the holder has in some manner contributed to the loss (most likely, by negligence in failing to send timely notice that the card was lost or stolen). If the card issuer is successful in proving its case, it may then recover $50—but no more—from the card holder.
While most credit card companies have taken steps to give notice of loss potential, pre-stamped lost-card notices, or sure means of identifying the card with its legitimate user, others have not. In view of the limited potential for recovery on the part of the card issuer, perhaps it should not be surprising if issuers choose to forgo the expense of sending notice, mailers, etc., to card holders. In any event, failure to do so relieves the card holder of any responsibility for misuse of a lost or stolen card. Is there, then, any need for continuation of credit card coverage?
Several considerations favor retention of the coverage. Foremost among them is the continued uncertainty of the card issuers response and uncertainty over the actual application of the laws. Though a card issuer has not complied with its requirements respecting notice to a holder, there is nothing to prevent the issuer's deciding to do so at any time. When and if that happens, the holder is exposed to a $50 loss. The holder's responsibility is set at $50 per card so the exposure mounts with each instance of compliance with the notice obligations by separate card issuers.
There may be a difference of opinion whether the issuer of a credit card has complied with the notice requirement of the law. Some card issuers send forms to card holders giving notice of a $50 loss potential, without also sending a pre-stamped mailer for use in reporting a lost card. However, most companies now provide a toll-free (800) number to call, and may feel this meets any obligation on their part. In any event, some holders of these cards may have to pay or prove otherwise—at their own expense if they do not have credit card coverage.
Moreover, as long as the credit card coverage is combined with the fund transfer card, the forgery, and the counterfeit money coverages, the need or desire for these coverages justifies retention of the credit card coverage insurance.
With the ease with which large databases of credit card numbers are accessed by hackers, and the prevalence of internet shopping, the possibility exists for the insured to be exposed to multiple losses at once.
ISO Credit Card, Electronic Fund Transfer Card Or Access Device, Forgery And Counterfeit Money
a. We will pay up to $500 for:
(1) The legal obligation of an “insured” to pay because of the theft or unauthorized use of credit cards issued to or registered in an “insured's” name;
(2) Loss resulting from theft or unauthorized use of an electronic fund transfer card or access device used for deposit, withdrawal or transfer of funds, issued to or registered in an “insured's” name;
(3) Loss to an “insured” caused by forgery or alteration of any check or negotiable instrument; and
(4) Loss to an “insured” through acceptance in good faith of counterfeit United States or Canadian paper currency.
All loss resulting from a series of acts committed by any one person or in which any one person is concerned or implicated is considered to be one loss.
This coverage is additional insurance. No deductible applies to this coverage.
b. We do not cover:
(1) Use of a credit card, electronic fund transfer card or access device:
(a) By a resident of your household;
(b) By a person who has been entrusted with either type of card or access device; or
(c) If an “insured” has not complied with all terms and conditions under which the cards are issued or the devices accessed; or
(2) Loss arising out of “business” use or dishonesty of an “insured”.
c. If the coverage in a. above applies, the following defense provisions also apply:
(1) We may investigate and settle any claim or suit that we decide is appropriate. Our duty to defend a claim or suit ends when the amount we pay for the loss equals our limit of liability.
(2) If a suit is brought against an “insured” for liability under a.(1) or (2) above, we will provide a defense at our expense by counsel of our choice.
(3) We have the option to defend at our expense an “insured” or an “insured's” bank against any suit for the enforcement of payment under a.(3)above.
AAIS Credit Card; Electronic Fund Transfer Card Or Access Device; Forgery; And Counterfeit Money
a. “We” pay for loss if an “insured”:
1) by law must pay for the theft or unauthorized use of credit cards issued or registered in the name of an “insured”;
2) has a loss resulting from the theft or unauthorized use of:
a) an electronic fund transfer card; or
b) an electronic access device that makes possible the deposit, withdrawal, or transfer of funds;
issued or registered in the name of an “insured”;
3) has a loss when checks, drafts, or negotiable instruments are forged or altered; or
4) accepts in good faith counterfeit United States or Canadian paper money.
The most “we” pay is $1,500 per occurrence unless a higher “limit” for Credit Card; Electronic Fund Transfer Card Or Access Device; Forgery; And Counterfeit Money is shown on the “declarations”. All loss resulting from a series of acts committed by any one person or in which any one person is involved or implicated is considered one occurrence.
b. “We” will defend a suit seeking damages against an “insured” if the suit results from the theft or unauthorized use of:
1) a credit card;
2) an electronic fund transfer card; or
3) an electronic access device that makes possible the deposit, withdrawal, or transfer of funds; issued or registered in an “insured's” name.
Subject to the limitation set forth in d. below, “we” will pay for the expense of such defense. Defense will be provided by counsel that “we” choose.
c. At “our” option, “we” may defend an “insured” or an “insured's” bank against a suit for the enforcement of payment when checks, drafts, or negotiable instruments are forged or altered. If “we” choose to provide such defense, “we” will pay for the expense. Defense will be provided by counsel that “we” choose.
d. “We” may make investigations and settle all claims or suits under this coverage that “we” decide are appropriate. “We” do not have to provide a defense after “we” have paid an amount equal to the “limit” that applies to Credit Card; Electronic Fund Transfer Card Or Access Device; Forgery; And Counterfeit Money as a result of a judgment or a written settlement agreed to by “us”.
e. “We” do not pay for loss:
1) that results from the use of a credit card, an electronic fund transfer card, or an electronic access device that makes possible the deposit, withdrawal, or transfer of funds:
a) if an “insured” has not complied with all rules under which the credit card, fund transfer card, or access device was issued or granted;
b) by a resident of “your” household; or
c) by a person who has the credit card, fund transfer card, or access device with the consent of an “insured”;
2) caused by the dishonesty of an “insured”; or
3) that results from the “business” of an “insured”;
nor do “we” provide a defense for suits resulting from such loss.
Analysis
The ISO homeowners forms offer up to a total of $500 as additional coverage for credit card, fund transfer card, forgery, and counterfeit money losses. (endorsement HO 04 53 10 00 may be used to increase the limit for this coverage). Automatic coverage is also provided under the American Association of Insurance Services (AAIS) readable personal lines policy. The AAIS policy has a total limit of $1,000 for credit card, forgery, and counterfeit money coverage under incidental property coverages.
The ISO forms refer to credit card, fund transfer card, forgery, and counterfeit money coverage; the AAIS homeowners policies refer to credit card, forgery, and counterfeit money coverage; the actual coverage on the AAIS forms, however, includes debit cards or fund transfer cards used to deposit, withdraw, or transfer funds. Both the ISO and AAIS policies, then, cover the same type of items.
The ISO homeowners forms will pay up to $500 for the legal obligation of an insured to pay because of the theft or unauthorized use of credit cards issued to or registered in an insured's name; the AAIS forms will pay up to $1,000 if an insured by law must pay for the unauthorized use of credit cards issued to or registered in the name of an insured.
Just exactly what is a credit card has sometimes been a question. The term is not defined in the ISO policies, so relying on the dictionary definition is appropriate. Black's Law Dictionary defines a “credit card” as “any card, plate, or other like credit device existing for the purpose of obtaining money, property, labor, or services on credit”; the term does not include a note, check, draft, money order, or other like negotiable instrument. This is broad enough to encompass charge plates, travel cards, oil company cards, cards issued by rental car companies, and even cards of private clubs; but it is not generally considered to include debit cards, that is, cards used to withdraw, deposit, or transfer bank funds via computer (also referred to as fund transfer or ATM cards). The ISO forms distinguish credit cards from fund transfer cards for coverage purposes.
The AAIS forms do not define credit cards, but include debit cards or fund transfer cards in the coverage provided. This is a significant difference from the ISO forms and the general consensus.
The ISO homeowners forms do not provide coverage if an insured has not complied with all the terms and conditions under which the credit card is issued, or if the card is used by a resident of the named insured's household or by a person who has been entrusted with the credit card. These exclusions are aimed at instances like a child using a parent's credit card without permission or a child who has been entrusted with a parent's credit card exceeding his authorized limit. In both examples, the policy will not respond to any legal obligations of the parent to pay the amounts charged by the child.
The AAIS policy excludes coverage for loss that occurs while a person, not an insured, has possession of the credit card with an insured's permission. Would the AAIS policy cover the use of a credit card by a family member who filches the card and uses it without permission? Possibly, but there is another exclusion that the insurer could rely on to deny such a claim. The AAIS policy states that the insurer does not pay for a loss that is caused by the dishonesty of an insured. The insurer could argue, quite plausibly, that the family member, an insured by definition, acted with dishonesty when he took the credit card without permission, acted dishonestly again when he used the card, and, therefore, the loss resulted from the dishonesty of an insured. Note that the ISO form also excludes coverage for loss arising out of dishonesty of an insured.
Coverage under both the ISO and the AAIS forms applies only to credit cards issued or registered in an insured's name; that is, cards belonging to anyone who qualifies as an insured under the terms of the policy but not, for instance, a card belonging to a friend, regardless of the reason the insured might be charged with the responsibility of caring for it.
A basic feature of credit card coverage is the provision that, for a loss to be covered, the insured must have complied with conditions and terms under which the credit card is issued. For example, most companies require the cardholder to sign the back of the card to prevent unauthorized use. Most companies issuing credit cards require immediate notice by the cardholder if the card is lost or stolen. Notice may be given by phone; some companies suggest this should be followed up in writing. Failure to give such notice can jeopardize coverage under the policy for charges made on the card by a person other than the insured. Some companies issuing credit cards require notice if someone other than the person to whom the card is issued will be using it. When authorization to use a card is withdrawn, the cardholder must notify the company in writing and return the authorized user's card, if any. Generally such permission is given only to family members or close friends, but it might raise some question as to coverage if proper notice had not been given and the card were lost or stolen.
Forgery coverage applies to loss caused by forgery or alteration of a check, draft (a written unconditional order by the drawer addressed to the drawee, requiring the drawee to pay a sum certain in money either on demand or in the future to the payee), promissory note, or negotiable instrument (a written unconditional promise, order, or direction to pay a sum certain in money, payable on demand, and payable to the bearer of the instrument). ISO's homeowners policies provide coverage for “loss to an insured caused by forgery or alteration of any check or negotiable instrument.” The AAIS policy provides coverage if an insured suffers a “loss when checks, drafts, or negotiable instruments are forged or altered.” The AAIS policy offers somewhat broader coverage in that the AAIS form speaks of drafts in addition to the “checks and negotiable instruments” mentioned by ISO.
Both forms give the insurer the option to defend an insured or an insured's bank against any suit for the enforcement of payment under the forgery coverage. This is a convenient plus for the insured whose bank requires him to protect the bank or otherwise hold the bank harmless from any claim based on forgery.
The ISO homeowners forms pay up to $500 for loss to an insured through acceptance in good faith of counterfeit United States or Canadian paper currency; the AAIS policies pay up to $1,000 for the same coverage. There are three aspects of this coverage.
First, the acceptance must be in good faith. Obviously, the insured must not accept currency that he knows is counterfeit. However, does acting in “good faith” also mean that if the insured suspects or should have known the currency is counterfeit, but accepts it anyway, that the insurer can deny coverage? The term “good faith” is an intangible and abstract quality with no written definition on the insurance policies; however, in Black's law dictionary, the term is used to describe that state of mind denoting honesty of purpose, freedom from intention to defraud, and freedom from knowledge of circumstances that ought to put the holder upon inquiry. Therefore, within that broad state of mind, the deciding of the meaning of the term would be on a case-by-case basis with the insured getting the benefit of the doubt.
The second point to note is that the coverage is limited to currency of the United States and Canada. If the insured suffers a loss by accepting counterfeit Mexican, European, or Japanese money, these forms will not apply.
Finally, the coverage applies only to paper currency or money. Such things as gold coins, precious metals, stamps, or even everyday coinage are not items that are meant to be considered when counterfeit money coverage is applied to a loss.
The ISO homeowners forms offer up to $500 coverage for loss resulting from theft or unauthorized use of a fund transfer card used for deposit, withdrawal, or transfer of funds; the card must be issued to or registered in an insured's name. This coverage is subject to the same exclusions that apply to the credit card coverage.
As noted previously, the AAIS forms do not have a separate category of coverage for fund transfer cards since such cards are specifically mentioned in the coverage. Therefore, the use of the fund transfer cards is subject to the same coverage and exclusions and conditions as is use of credit cards.
Some of the exclusions that apply to a particular coverage have been discussed previously, but there are two exclusions that apply to the four categories of coverage in general. First, the policies do not cover loss arising out of the dishonesty of an insured. Second, loss arising from business pursuits of an insured is excluded; the coverages discussed here are considered as being of the personal type, not business or commercial.
The ISO homeowners forms contain a paragraph on this subject in a somewhat different format than that of the AAIS policies. The ISO forms state that the insured may investigate and settle any claim deemed appropriate and that the duty to defend ends when the amount paid equals the limit of liability—$500—or whatever amount has been selected on the HO 04 53. Also, the ISO forms clearly state that if a suit is brought against an insured for liability under the credit card or fund transfer card coverage, the insurer will provide a defense. The AAIS policies provide a defense if suit against the insured results from the theft or unauthorized use of a credit card, electronic fund transfer card, or an ATM card.
When a loss is discovered or an occurrence takes place that might give rise to a loss, the insured must, as soon as practical, notify the insurer, the police (if a crime has been committed) and, if a credit card is involved, the credit card company. Detailed proof of loss must be filed within 60 days after the request of the insurer under both the ISO and AAIS forms. This detailed proof of loss includes, among other things, evidence or an affidavit supporting a claim that states the amount and cause of loss.
Regardless of any deductible provision in the policies, no deductible applies to credit card, forgery, or counterfeit money losses.