Fourteen Checks, One Employee, One Limit
Cedar Falls Dental Group buys a commercial crime policy with employee dishonesty limits of $100,000 per occurrence and a $2,500 deductible, plus forgery or alteration coverage of $25,000. In September a newly hired office manager began mailing checks to a consulting entity she controlled - fourteen checks totaling $212,000, running from September through the following June, each signed by the dentist, who never opened a bank statement. The outside accountant discovered the scheme on July 2. The policy, written with the same carrier, renews each January 1. On the January application the dentist answered no to the question about known prior dishonesty, unaware that a part-time bookkeeper had diverted $18,000 three years earlier at a prior employer. That bookkeeper still works at the practice.
1. Is this one occurrence or fourteen, and what is the maximum the employee dishonesty insuring agreement pays?
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One occurrence. Commercial crime forms define occurrence for employee dishonesty as all loss caused by, or involving, one or more employees - whether the result of a single act or a series of acts. Fourteen checks by one person over ten months is a series.
Maximum payable:
- Limit: $100,000
- Deductible: $2,500
- Net recovery: $97,500 against a $212,000 loss - an uninsured $114,500.
The trap: the insured will point out it bought a per-occurrence limit and argue each check is a separate occurrence, producing fourteen limits. That reads the definition backwards - the per-occurrence structure exists to aggregate a series by one employee into a single limit, not to multiply it.
Related: if a second employee had later joined the scheme, collusion would still aggregate them into one occurrence under most forms. If a completely unrelated employee ran an independent scheme, that would be a second occurrence and a second limit - which is why the limit should be set against realistic exposure, not against a single bad hire.
2. The scheme straddles a January 1 renewal with the same carrier. Which policy year pays, and can the insured collect twice?
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Coverage is triggered by discovery, not by the date of the theft. The modern ISO commercial crime form covers loss resulting from employee dishonesty committed at any time - there is no retroactive date - provided the loss is discovered during the policy period (or within the form's extended discovery window after termination).
So: the policy in force on July 2 responds in full, including the September-through-December acts that preceded that policy period.
No double recovery. The occurrence is the series of acts by one employee; only one limit applies to it. The insured cannot take $100,000 from the current year and $100,000 from last year for the same occurrence, and the carrier that pays has subrogation rights against the employee.
Version check that matters: if the form is written on a loss sustained basis rather than a loss discovered basis, acts occurring before the policy period are excluded and the analysis changes materially. Always confirm which trigger the form uses.
Extended discovery: if the insured had cancelled and not replaced the policy, the form's extended period (commonly one year, and only for a policy cancelled or nonrenewed) would still have applied. Cancellation timing is a live issue for a practice that changes carriers mid-scheme.
3. The insurer learns of the bookkeeper's prior theft at another employer and of the no answer on the application. Evaluate its rescission argument and the effect on the bookkeeper's future coverage.
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Rescission is weak on these facts.
- The application answer is a misrepresentation only if the signer knew the truth or answered with reckless disregard. The dentist had no knowledge of the bookkeeper's prior conduct, so there is no knowing misstatement and, in most states, no basis for rescission absent materiality plus intent (or a clear innocent-misstatement statute).
- Materiality is arguable - a carrier may well have rated differently - so expect a negotiation, not a clean rescission.
- The fraud and concealment conditions require intentional concealment, which is absent.
The prior-dishonesty condition is the real weapon, and it is prospective. Coverage terminates automatically as to any employee as soon as an officer, partner, or director not in collusion learns of a dishonest or fraudulent act committed by that employee - at any time, with any employer. Once the dentist learns of the $18,000 diversion:
- The bookkeeper is no longer covered for any future dishonesty, even if she is retained and never steals again.
- The office manager is a different employee; her coverage is unaffected by another employee's history.
Action for the insured: remove the bookkeeper from any check-signing, reconciliation, or vendor-master authority, and get a carrier endorsement acknowledging the situation. Retention without controls converts a $18,000 precedent into an uninsured exposure.