Employee Theft and Forgery Policy
Discovery and Loss Sustained Forms
Includes copyrighted material of Insurance Services Office, Inc., with its permission.
October 9, 2015
Summary: The employee theft and forgery policy is updated as of November 2015. Changes have been made for clarification purposes and to keep up with changing technology. The policy is still very similar to the commercial crime policy, and only changes are discussed here. See Commercial Crime Policy. A new exclusion for virtual currency exists, and changes have been made to the exclusion for confidential or personal information.
The definition of "premises" has been removed; only policy language that differs will be presented, as there are still many similarities.
The employee theft and forgery policy has two versions, the discovery version and the loss sustained version—CR 00 28 11 15 and CR 00 29 11 15 respectively.
Since the differences between the discovery and loss sustained policies are discussed in the commercial crime policy those differences will not be discussed here. See Commercial Crime Policy.
Topics covered:
Coverage is provided under the following Insuring Agreements for which a Limit of Insurance is shown in the Declarations and applies to loss that you sustain resulting directly from an "occurrence" taking place at any time which is "discovered" by you during the Policy Period shown in the Declarations or during the period of time provided in the Extended Period To Discover Loss Condition E.1.j.:
1.Employee Theft
We will pay for loss of or damage to "money", "securities" and "other property" resulting directly from "theft" committed by an "employee", whether identified or not, acting alone or in collusion with other persons.
For the purposes of this Insuring Agreement, "theft" shall also include forgery.
2.Forgery Or Alteration
a.We will pay for loss resulting directly from "forgery" or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in "money" that are:
(1)Made or drawn by or drawn upon you; or
(2)Made or drawn by one acting as your agent;
or that are purported to have been so made or drawn.
For the purposes of this Insuring Agreement, a substitute check as defined in the Check Clearing for the 21st Century Act shall be treated the same as the original it replaced.
b.If you are sued for refusing to pay any instrument covered in Paragraph 2.a., on the basis that it has been forged or altered, and you have our written consent to defend against the suit, we will pay for any reasonable legal expenses that you incur and pay in that defense. The amount that we will pay is in addition to the Limit of Insurance applicable to this Insuring Agreement.
Analysis
There is no change to the insuring agreements. The agreements state that coverage is provided when a limit shown on the declarations applies to a loss that has occurred as a result of a defined "occurrence," which was "discovered" by the insured during the policy period or the extended period to cover loss. This restricts the policy so that the nature of the loss and how it is discovered are defined and must fit those definitions before the policy limit can apply.
The forgery or alteration agreement is the same as in the prior policies. Loss caused by forgery or alteration of checks, drafts, promissory notes, or similar promises is covered. "Forgery" is defined as the signing of the name of another person or organization with the intent to deceive; it does not include a signature that consists in whole or part of one's actual name, signed with or without authority, in any capacity, for any purpose. For example, company drafts are stolen and the thief signs the checks as if he were the authorized signer, using that person's name. This is a forgery by definition; the intent is to deceive the bank into thinking the check is legitimately signed and authorized. However, if an authorized signer writes himself a check for expenses for a weekend at the spa, that is not a forgery.
The form contains language stating that a "substitute check" as defined in the Check Clearing for the Twenty-first Century Act shall be treated the same as the original it replaces. Check Clearing 21 is a federal law designed to allow banks to handle checks electronically, thus making processing faster and more efficient. A substitute check is a paper copy of the front and back of the original check; it is slightly larger so that a picture of the original check can be presented. Very specific standards dictate how the substitute check is printed so that it can be used the same way as the original check. With a substitute check, banks can transmit the information electronically instead of physically moving a paper check. This is different than converting checks to electronic payments; different regulations govern electronic funds and paper checks.
Loss resulting from:
(1)The disclosure or use of another person's or organization's confidential or
personal information; or
(2)The disclosure of your confidential or personal information. However, this Paragraph 1.c.(2) does not apply to loss otherwise covered under this Policy that results directly from the use of your confidential or personal information.
For the purposes of this exclusion, confidential or personal information includes, but is not limited to, patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.
d.Data Security Breach
Fees, costs, fines, penalties and other expenses incurred by you which are related to the access to or disclosure of another person's or organization's confidential or personal information including, but not limited to, patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.
g.Virtual Currency
Loss involving virtual currency of any kind, by whatever name known, whether actual
or fictitious including, but not limited to, digital currency, crypto currency or any
other type of electronic currency.
Analysis
With the concerns regarding identity theft, and recent situations where companies' computers with large amounts of confidential information have been lost or stolen, unauthorized disclosure of such information is excluded. The exclusion has been updated for clarification. The exclusion now makes it clear that disclosure or use of another person's or organization's confidential or personal information is excluded. There is an exception for loss otherwise covered in this policy for the use of the insured's information. Therefore, if an employee takes the insured's customer information and uses it to his advantage to obtain cash or other valuable property there is still coverage. The form then identifies what is considered personal or confidential information, including but not limited to patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.
The data breach exclusion remains the same. This excludes fees, penalties, and fines associated with the breach of an insured's data. If the insured is fined by a regulatory agency, such fines will not be covered. The FTC may fine a company for a loss of data. For instance, in 2006 ChoicePoint was fined $10 million for loss of consumer records. The March 2014 Target breach of 40 million records is being investigated. Companies may have to pay fines and agree to multiyear reviews of their compliance with regulations after a breach. None of these fines are covered.
A new exclusion for virtual currency has been added. Virtual currency is not defined in the policy; it has been defined by the European Central Bank as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community." While considered to be currency by its users, the Internal Revenue Service has decided to treat virtual currencies as property for tax purposes, not currency. Bitcoin is a well-known virtual currency. Bitcoins are generated by a computer network, and have no central monetary authority. Bitcoins are mined by computers processing difficult number-crunching formulas, called mining. The mining network monitors and verifies the creation of new bitcoins and the transfer of bitcoins between users. Bitcoins can be bought and sold in return for traditional currency on many exchanges. It is a token of value as well as a method of transferring that value. The value of bitcoins changes rapidly and they can only be used once. There is a public ledger of all Bitcoin transactions called the blockchain, so buying a Bitcoin is really buying a spot in the blockchain. Bitcoins are bought and sold through online exchanges and can be hacked like any other computer information. If a Bitcoin user's wallet gets hacked, there is no recourse for the owner of the coins. Unlike credit cards where an unauthorized transaction can be reported or a new card can be issued, once a Bitcoin is gone it's gone. Therefore, with the prevalence of sites being hacked for credit card and other information, virtual currency in any form is excluded from coverage.
l.Joint Insured
(1)If more than one Insured is named in the Declarations, the first Named Insured
will act for itself and for every other Insured for all purposes of this Policy. If
the first Named Insured ceases to be covered, then the next Named Insured
will become the first Named Insured.
(2)If any Insured, or partner, "member", "manager", officer, director or trustee of
that Insured has knowledge of any information relevant to this Policy, that
knowledge is considered knowledge of every Insured.
Analysis
The joint insured condition has been modified to include managers, directors or trustees of the insured in the list of those who, if they have knowledge of information relevant to the policy, that that knowledge is considered to be known by all insureds. The earlier form only ascribed knowledge from Insureds, partners, members or officers to remaining insureds within the organization.
h.Employee Benefit Plans
The "employee benefit plans" shown in the Declarations (hereafter referred to as Plan) are included as Insureds under Insuring Agreement A.1., subject to the following:
(1)If any Plan is insured jointly with any other entity under this Policy, you or the Plan Administrator is responsible for selecting a Limit of Insurance for Insuring Agreement A.1. that is sufficient to provide a Limit of Insurance for each Plan that is at least equal to that required under ERISA as if each Plan were separately insured.
(2)With respect to loss sustained or "discovered" by any such Plan, Insuring Agreement A.1. is replaced by the following:
We will pay for loss of or damage to "money", "securities" and "other property" resulting directly from fraudulent or dishonest acts committed by an "employee", whether identified or not, acting alone or in collusion with other persons.
(3)If the first Named Insured is an entity other than a Plan, any payment we make for loss sustained by any Plan will be made to the Plan sustaining the loss.
(4)If two or more Plans are insured under this Policy, any payment we make for loss:
(a)Sustained by two or more Plans; or
(b)Of commingled "money", "securities" or "other property" of two or more Plans; resulting directly from an "occurrence", will be made to each Plan sustaining loss in the proportion that the Limit of Insurance required under ERISA for each Plan bears to the total of those limits.
(5)The Deductible Amount applicable to Insuring Agreement A.1. does not apply to loss sustained by any Plan.
Analysis
The wording in the employee benefit plans section has not changed. The section was renumbered in the prior form so that what was section (1) is now an introductory statement. Section (1) now states that the limit must meet those required by ERISA as if the plan was separately insured; the prior policy stated that the limit must be equal to that required, but it was not indicated who was setting any requirements. Section (2) removed "funds" as what payment for loss or damage is for and replaced it with "money" and "securities."
l.Joint Insured
(1) If more than one Insured is named in the Declarations, the first Named Insured
will act for itself and for every other Insured for all purposes of this Policy. If
the first Named Insured ceases to be covered, then the next Named Insured
will become the first Named Insured.
(2) If any Insured, or partner, "member", "manager", officer, director or trustee of
that Insured has knowledge of any information relevant to this Policy, that
knowledge is considered knowledge of every Insured.
Analysis
The joint insured condition has been modified to include managers, directors or trustees of the insured in the list of those who, if they have knowledge of information relevant to the policy, that that knowledge is considered to be known by all insureds. The earlier form only ascribed knowledge from Insureds, partners, members or officers to remaining insureds within the organization.
p.Ownership Of Property; Interests Covered
The property covered under this Policy is limited to property:
(1)That you own or lease;
(2)That is held by you in any capacity; or
(3)For which you are legally liable, provided you were liable for the property prior to the time the loss was sustained.
However, this Policy is for your benefit only. It provides no rights or benefits to any other person or organization. Any claim for loss that is covered under this Policy must be presented by you.
Analysis
This section has not changed. Property that the insured is legally liable for is also covered as long as the insured was legally liable for the property prior to the loss. This broadens coverage so that property that is in a warehouse is covered as well.
x.Valuation – Settlement
The value of any loss for purposes of coverage under this Policy shall be determined as follows:
(1)Money
Loss of "money" but only up to and including its face value. We will, at your option, pay for loss of "money" issued by any country other than the United States of America:
(a) At face value in the "money" issued by that country; or
(b) In the United States of America dollar equivalent, determined by the rate of exchange published in The Wall Street Journal on the day the loss was "discovered".
(2)Securities
Loss of "securities" but only up to and including their value at the close of business on the day the loss was "discovered". We may, at our option:
(a) Pay the market value of such "securities" or replace them in kind, in which event you must assign to us all your rights, title and interest in and to those "securities"; or
(b)Pay the cost of any Lost Securities Bond required in connection with issuing duplicates of the "securities".
However, we will be liable only for the payment of so much of the cost of the bond as would be charged for a bond having a penalty not exceeding the lesser of the:
(i)Market value of the "securities" at the close of business on the day the loss was "discovered"; or
(ii)Limit of Insurance applicable to the "securities".
(3)Property Other Than Money And Securities
(a)Loss of or damage to "other property" for the replacement cost of the property without deduction for depreciation. However, we will not pay more than the least of the following:
(i)The Limit of Insurance applicable to the lost or damaged property;
(ii)The cost to replace the lost or damaged property with property of comparable material and quality and used for the same purpose; or
(iii)The amount you actually spend that is necessary to repair or replace the lost or damaged property.
(b)We will not pay on a replacement cost basis for any loss or damage to property covered under Paragraph x.(3)(a):
(i)Until the lost or damaged property is actually repaired or replaced; and
(ii)Unless the repair or replacement is made as soon as reasonably possible after the loss or damage.
If the lost or damaged property is not repaired or replaced, we will pay on an actual cash value basis.
(c)We will, at your option, pay for loss or damage to such property:
(i)In the "money" of the country in which the loss or damage was sustained; or
(ii)In the United States of America dollar equivalent of the "money" of the country in which the loss or damage was sustained, determined by the rate of exchange published in The Wall Street Journal on the day the loss was "discovered".
(d)Any property that we pay for or replace becomes our property.
Analysis
The valuation section was revised for clarification in the prior form and has not been changed in the 2015 update.
a. Currency, coins and bank notes in current use and having a face value;
b. Traveler's checks and money orders held for sale to the public; and
c. Deposits in your account at any financial institution.
8."Other property" means any tangible property other than "money" and "securities" that has
intrinsic value. "Other property" does not include computer programs or electronic data or any property specifically excluded under this Policy.
Analysis
The definitions of "money" and "other property" were revised in the prior form. No changes have been made in the 2015 edition. The section "deposits in your account at any financial institution" clarifies that deposits in a financial institution are not different than currency and bank notes. The definition of "other property" excludes computer programs or equipment that are already specifically excluded by the policy. This is to clarify that the definition of "other property" does not make an exception to an exclusion.
The definition of "premises" has been removed. It was self-explanatory and really not needed in order to understand the policy.