Fidelity Bonds and Commercial Crime Coverages
What the coverage actually promises
Fidelity bonds and commercial crime policies respond to dishonest or fraudulent acts, but they are not interchangeable. A true fidelity bond indemnifies the insured for employee dishonesty-theft or forgery by an employee acting with manifest intent to cause the insured a loss and obtain a benefit. Commercial crime forms broaden the peril set: employee theft, forgery or alteration, computer fraud, funds transfer fraud, robbery, burglary, theft, counterfeit currency, and money order fraud. Know the coverage trigger: discovery forms pay losses discovered during the policy period, subject to a retroactive date; loss sustained forms pay only losses that both occur and are discovered during the policy period, plus any extended discovery period.
Traps examiners use
- Employee vs. outsider: theft by a non-employee is not employee dishonesty; it may fall under robbery, burglary, or theft coverage only if that insuring agreement is purchased.
- Manifest intent: an employee who takes money intending to repay it may still act with manifest intent if the insured suffers a loss and the employee intended a benefit.
- Computer fraud vs. funds transfer fraud: computer fraud involves unauthorized access to computer systems; funds transfer fraud involves fraudulent instructions to a financial institution. Social engineering fraud is often separately endorsed.
- Discovery after termination: a discovery period may apply, but coverage for losses discovered after termination is limited.
- Limits: each insuring agreement may have its own limit; deductibles apply per loss, and an aggregate may cap multiple losses.
Worked example
An employee colludes with a vendor to approve inflated invoices, diverting $80,000. The policy has a $1 million employee theft limit and a $10,000 deductible. The loss is employee dishonesty because the employee intended to cause the insured loss and obtain a benefit. Recovery is $70,000. If a non-employee hacker instead redirected a wire, the claim would depend on computer fraud or funds transfer fraud coverage, not employee theft.
Rule of thumb
Read the insuring agreement, not just the policy title: identify the covered act, the covered actor, and the trigger before analyzing the limit.