The Employee Who Signed the Checks
Meadowbrook Association, a nonprofit, carries a commercial crime policy with employee theft coverage of $250,000 per loss, a $10,000 deductible, and a discovery period of one year after the policy expires. Its bookkeeper, hired in 2019, had authority to prepare checks but not to sign them. Beginning in 2020, she prepared checks payable to a fictitious vendor, obtained the executive director's signature by presenting them in a stack of legitimate invoices, and deposited them into an account she controlled. The scheme ran undetected until a new auditor reviewed vendor records in March 2024 and found $310,000 had been diverted. The association's policy was renewed annually, and the current policy incepted on 1 January 2024. The insurer argues the loss occurred before the current policy period and that the executive director's negligence in signing the checks bars recovery.
1. Determine whether the loss is covered under the current policy, addressing the discovery period, the prior-acts issue, and the per-loss limit.
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The loss is likely covered, subject to the limit and deductible. Crime policies are written on a discovery basis: they respond to loss discovered during the policy period, even if the dishonest acts occurred earlier, provided the loss was not discovered under an earlier policy. The scheme was discovered in March 2024, within the 2024 policy period, and the one-year discovery period after expiry is irrelevant because discovery occurred during the term.
The prior-acts issue is the harder question. Many crime forms exclude loss caused by acts committed before the policy's retroactive date, or they exclude loss discovered under a prior policy. If the 2024 policy carries a retroactive date of 1 January 2024, the 2020–2023 acts would fall outside coverage. If it carries no retroactive date or a retroactive date earlier than 2020, the loss is covered. The adjuster must read the retroactive date, not assume the annual renewal resets coverage.
The $310,000 loss exceeds the $250,000 per-loss limit, so the maximum payable is $250,000 less the $10,000 deductible = $240,000, leaving $70,000 uninsured. The association should consider a higher limit given that the scheme ran for four years undetected.
2. Respond to the insurer's argument that the executive director's negligence bars recovery, and identify the control failures the association should address.
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The negligence argument should fail. Employee theft coverage is not conditioned on the insured exercising due diligence in preventing the loss; the coverage exists precisely because internal controls fail. The executive director's failure to compare the checks to supporting invoices is negligence, not dishonesty, and negligence is not an exclusion under a standard employee theft insuring agreement. The insurer would need a specific exclusion for loss caused by the insured's failure to maintain stated controls, and even then the exclusion is narrowly construed.
The one argument the insurer might make is that the executive director knew or should have known of the scheme, which could trigger an exclusion for collusion by a principal. There is no evidence of that here; the director was deceived.
The control failures are clear and worth documenting: one person prepared checks and controlled vendor records; the signer did not review supporting documentation; there was no vendor master-file review; and the audit was annual rather than periodic. The association should implement segregation of duties between check preparation and signing, require supporting documentation with every signature, verify new vendors independently, conduct surprise audits, and use positive pay with its bank. It should also review whether the crime limit reflects four years of undetected exposure. The lesson for the exam is that crime coverage responds to the loss, not to the quality of the insured's controls, but the controls determine how large and how long the loss runs.