Discovery After Replacement: Two Crime Policies, One Theft
Ridgeway Dental Group carried employee theft coverage of $500,000 with Carrier A through June 30, 2024, when Carrier A non-renewed the account. On July 1, 2024, Ridgeway bound a $250,000 employee theft limit with Carrier B; both forms are discovery-based crime forms. Neither policy has a social engineering endorsement. On August 20, 2024, a new outside accountant found that the office manager had diverted insurance refunds and patient co-pays by altering deposit records from January 2021 through May 2024. The total is $412,000. The office manager was terminated August 21. Carrier A's policy contains a 60-day extension for losses discovered after expiration upon non-renewal, but the extension states it does not apply if the insured obtains replacement coverage. Ridgeway gave written notice to Carrier B on August 26 and to Carrier A on September 9.
1. Which policy responds to the $412,000 loss, and in what order? Explain the trigger you applied.
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Trigger. Employee theft is discovery-based: the insured must discover the loss during the policy period or an applicable extension. Discovery occurs when a responsible officer learns facts giving reasonable cause to believe a loss occurred, not when the amount is finally calculated.
- Carrier A: the policy expired June 30; the loss was found August 20. The 60-day extension applies only when the policy is not renewed and not replaced. Ridgeway replaced the coverage on July 1, so the extension is unavailable. A owes nothing unless earlier knowledge can be imputed.
- Carrier B: discovery on August 20 fell inside B's period. B's employee theft coverage reaches theft committed before inception unless the insured knew of the employee's dishonesty before July 1. No such knowledge appears here. B responds first, up to $250,000.
- B's prior-insurance condition makes B excess only if A actually covers the loss, which it does not.
Result: B pays its $250,000 limit; $162,000 is uninsured. Obtain A's written denial before treating B as primary.
2. What facts would change the allocation, and how would you develop them?
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The allocation turns on the knowledge date and on whether replacement coverage existed.
- Earlier discovery. If any officer knew before June 30 about missing deposits or altered records, discovery is fixed in A's period. A's $500,000 limit then responds, and B's prior-insurance clause makes B excess, so B pays nothing.
- No replacement. If Ridgeway had gone bare rather than binding B on July 1, A's 60-day extension could allow A to respond to an August 20 discovery.
- Post-inception theft. Any diversion after July 1 is unquestionably B's, but the single $250,000 limit still caps the total; the policy does not reset per act.
- Prior dishonesty. If the office manager had a known dishonest act before July 1, B's prior-dishonesty exclusion could bar the entire claim.
Develop the record by interviewing the accountant and each officer, reviewing internal reports and emails, and obtaining A's and B's applications and loss histories. Pin down the first date anyone had reasonable cause to suspect a loss.
3. List the immediate claim-handling steps Ridgeway and its broker should take.
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- Send written notice to both carriers and ask each to confirm coverage position in writing; do not let B assume A is primary.
- Preserve the altered deposit records, refund logs, emails, and the accountant's workpapers; image the office manager's computer before it is wiped.
- Prepare a sworn proof of loss with a transaction-by-transaction schedule, separating pre- and post-July 1 theft.
- Do not settle with or release the office manager without the insurers' consent; any restitution offsets the loss and may create a recovery right for the insurers.
- Check whether any diverted funds were patient trust or benefit-plan assets, which may bring a separate bond or ERISA coverage into play.
- Consider a forensic audit of all cash-handling functions and change bank accounts, signatures, and vendor master data immediately.
- Diary B's notice and proof-of-loss deadlines; late notice is an independent coverage defense.