EMPLOYEE THEFT WHO IS AN EMPLOYEE? Robin Federici, CPCU, AAI, ARM, AINS, AIS, CPIW PO BOX 781 NORTH KINGSTOWN, RI 02852 Robin s Cell-401-529-9617 Fred s Cell-401-524-4567 E-mail: ROBINF@IETA.BIZ EFEDERICI@IETA.BIZ Web site: WWW.IETA.BIZ 1
WHY THE NEED FOR CRIME INSURANCE? Most businesses need some type of crime coverage Commercial Property forms include only limited coverage for the theft exposure Only the Special Cause of Loss form, in the Commercial Property program, includes theft coverage of property other than money and securities Thefts caused by employees are excluded OVERVIEW Formerly, ISO and SAA shared responsibility for crime insurance. However, in 1999 SAA promulgated its own crime forms and ISO followed suit in 2000. Currently, there are four different commercial crime programs in use: The ISO commercial crime program, developed by Insurance Services Office, Inc. (ISO) The SAA crime protection policy, developed by the Surety Association of America (SAA) The American Association of Insurance Services (AAIS) commercial crime program The ISO/SAA commercial crime program. This joint program has been replaced by separate ISO and SAA programs, but its forms, which have edition dates ranging from 1990 to 1997, are still used by some insurers. Insurers may elect to use the forms in any of these programs, or they may develop their own versions of them. 2
ISO EMPLOYEE THEFT FOR COMMERCIAL ENTITITES EMPLOYEE THEFT COVERAGE (Commercial Entities) 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. 1. Property covered 2. Peril 3. Who is the perpetrator of a theft loss Comparing theft with dishonesty : The previous crime form covered "employee dishonesty" as opposed to "theft." Employee Dishonesty coverage covered all dishonest acts committed by an employee with the manifest intent to cause harm to the named insured. Dishonest acts had to have a dual intention: (1) to cause harm to the employer and (2) to result in financial gain for the dishonest employee. Under the current Employee Theft, the act must only result in loss to the "deprivation of the Insured." 3
ISO EMPLOYEE THEFT FOR COMMERCIAL ENTITITES COVERAGE OVERVIEW ISO offers coverage on a blanket basis for theft by an individual that meets the definition of employee The names or positions covered are not listed The limit applies to each loss, regardless of how many employees were involved There is no requirement that the specific employee(s) is identified Since this insuring agreement provides coverage for loss from theft by an employee, an understanding of who qualifies as an "employee" is crucial to an understanding of the coverage provided. The definition of the term "employee" is located in the definitions section at the end of each of the forms Position or Name Schedule: ISO offers endorsement options to limit this protection to either (1) specific individuals, or (2) specific positions. This endorsement Employee Theft name or position schedule (CR 04 08) amends the policy to provide coverage by providing the limit of insurance per employee (for those names/positions shown) for each identified employee involved in a loss If the policy has been endorsed to provide scheduled (rather than blanket) employee theft coverage (using the employee theft name or position schedule endorsement, CR 04 08) the definition of "employee" in the endorsement replaces the definition in the coverage form Other Employee Endorsements: ISO offers several other endorsements that can be used to amend the definition of employee under the Employee Theft coverage 4
EMPLOYEE DEFINED ISO s definition includes 8 categories that fit the employee definition: "Employee" a. "Employee" means: (1) Any natural person: (a) While in your service and for 30 days immediately after termination of service, unless such termination is due to theft or any dishonest act committed by the employee ; and (b) Who you compensate directly by salary, wages or commissions; and (c) Who you have the right to direct and control while performing services for you (2) Any natural person who is furnished temporarily to you: (a) (b) To substitute for a permanent "employee" To meet seasonal or short-term work load conditions; while that person is subject to your direction and control and performing services for you, or (3) Any natural person who is leased to you under a written agreement between you and a labor leasing firm, to perform duties related to the conduct of your business, but does not mean a temporary employee as defined in Paragraph a.(2); (4) Any natural person who is: (a) A trustee, officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of any "employee benefit plan(s)" insured under this policy; and (b) Your director or trustee while that person is handling "funds" or "other property of any "employee benefit plan(s)" insured under this policy. (5) Any natural person who is a former "employee", partner, "member", "manager", director or trustee retained as a consultant while performing services for you; (6) Any natural person who is a guest student or intern pursuing studies or duties; 5
(7) Any "employee" of an entity merged or consolidated with you prior to the effective date of this insurance; or (8) Any of your "managers", directors or trustees while: (a) Performing acts within the scope of the usual duties of an "employee"; or (b) Acting as a member of any committee duly elected or appointed by resolution of your board of directors or board of trustees to perform specific, as distinguished from general, directorial acts on your behalf. b. "Employee" does not mean any agent, broker, factor, commission merchant, consignee, independent contractor or representative of the same general character not specified in Paragraph 5.a. UNIQUE CRIME CONDITIONS Termination as to any Employee This insuring agreement terminates as to any employee : (1) As soon as: (a) You; or (b) Any of your partners, "members", "managers", officers, directors or trustees not in collusion with the "employee"; learn of "theft" or any other dishonest act committed by the "employee" whether before or after becoming employed by you. (2) On the date specified in a notice mailed to you. That date will be at least 30 days after the date of mailing. We will mail or deliver our notice to the first Named Insured's last mailing address known to us. If the notice is mailed, proof of mailing will be sufficient proof of notice. 6
ISO CRIME FORM EMPLOYEE EXCLUSIONS The ISO Crime Forms (loss sustained or discovery basis) is also subject to the following EMPLOYEE exclusions which apply to all insuring agreements. Acts committed by the insured, partners, or limited liability company members Acts committed by employees, limited liability company managers, directors, trustees, or representatives, except when covered under the employee theft insuring agreement Acts of employees whose prior dishonesty was known to the insured EXCLUSIONS APPLICABLE TO THE ENTIRE POLICY Acts committed by You, Your Partners, or Your Members - Acts Committed by Your Employee Learned of by You Prior to the Policy Acts committed by Your Employees, managers, directors, trustees, or representatives Confidential or Personal information - Data Security Breach Government Action Indirect loss Legal fees, Costs and Expenses except under Forgery and Alteration coverage Nuclear Hazard Pollution War and Military Action 7
EMPLOYEE BENEFIT PLANS The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans ERISA covers retirement, health and other welfare benefit plans (e.g., life, disability and apprenticeship plans). Every person, including a fiduciary, who handles plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss by reason of acts of fraud or dishonesty on the part of persons covered by the bond. The Employee Retirement Income Security Act (ERISA) requires bonding of those handling funds of an employee welfare or benefit plan Plans that are subject to this requirement are not limited to only 401(K), profit sharing, and pension plans, but also medical, dental, vision, life, and disability insurance plans ERISA requirements are that the limit of insurance is 10% of the funds handled, subject to a minimum of $1,000 and a maximum of $500,000. However, if the plan includes employee securities, other than as part of a broadly diversified fund such as a mutual or index fund, the maximum required amount of insurance is $1 million. ISO underwriting guidelines allow these ERISA requirements to be met by simply including the plans as named insureds. There is no need to attach any endorsements since the definition of employee has been amended to accommodate this option. The term "employee benefit plan(s)" is as "any welfare or pension benefit plan shown in the declarations that is subject to the Employee Retirement Income Security Act of 1974 (ERISA)." 8
EMPLOYEE BENEFIT PLANS o ISO allows coverage for the plan by just adding the name of the plan as a named insured o Employee Benefit Plan is defined as any welfare or pension benefit shown & subject to ERISA o The definition of the term employee includes officers, trustees, etc. o Reminder: There is no coverage for plan administrators and managers who are independent contractors o Many, if not most, insureds use outside firms to manage and administer one or more of their welfare and benefit plans. For example, many insureds use an investment firm to manage and administer their 401K plans. Since these firms must be bonded to handle funds under ERISA, most insureds would have a means of recovery if an employee of such a firm were to steal funds from the insured's plan. ISO endorsement option: Coverage can also be provided under the insured's crime insurance policy, by attaching CR 25 02 (include designated agents as employees). 9
REMINDER WHO IS AN EMPLOYEE UNDER CRIME FORMS 1. Employed compensated & directed/controlled 2. Temps directed & controlled 3. Leased workers under contract 4. Trustees, officer, directors, employees, administrators & managers of an employee benefit plan 5. Former employees, partners, managers, directors or trustees retained as consultant 6. Guest students & interns 7. Employees of newly merged/consolidated entities if prior to the effective date 8. Managers/directors/trustees performing duties of an employee OR a committee member (elected or appointed) 10
ISO ENDORSEMENT OPTIONS COMMERCIAL ENTITIES Employee Theft name or position schedule (CR 04 08): Amends the definition of employee to include: o any person named in the schedule, if coverage applies on a name schedule basis; or o Any person who performs the duties of a position shown in the schedule if coverage applies on a position schedule basis. Exclude Designated Persons or Classes of Persons as Employees (CR 25 01) This endorsement eliminates employee theft coverage for acts of the specific individuals or classes of persons identified in the endorsement schedule. Include Designated Agents as Employees (CR 25 02) This endorsement adds coverage for theft by agents appointed by the insured in writing and designated in the endorsement schedule. For example, this endorsement can be used to add the independent contractors the insured uses to administer their employee benefit plans(s) The designated agents may be individuals, partnerships, or corporations Each agent and the partners, officers, and employees of that agent collectively are considered to be a single employee The limit listed on the endorsement schedule is not an additional amount, rather it is part of the employee theft limit shown in the declarations 11
ISO ENDORSEMENT OPTIONS Include Partners as Employees (CR 25 03) This endorsement amends the definition of employee and the "Acts Committed by You, Your Partners, or Your Members" to add coverage for theft by the partners identified in the schedule Coverage applies only to loss in excess of the value of that partner's interest in the partnership, any amounts owed to that partner, and the deductible Note: this endorsement does not prevent the other partners from suffering a loss. In fact, the loss of the dishonest partner's share of the business could well force the innocent partners to dissolve it. Include Members of a Limited Liability Company as Employees (CR 25 04) This endorsement is similar to the above partner endorsement Coverage for loss caused by dishonesty of a member applies only to loss in excess of the value of that member's membership interest in the limited liability company, any amounts owed to that member, and the deductible Like the partner endorsement above, this endorsement also attempts to force the dishonest member to suffer the loss, but steps in when the amount of the loss exceeds that member's share of the business 12
ISO ENDORSEMENT OPTIONS Include Chairperson and Members of Specified Committees as Employees (CR 25 06) This endorsement is a "class of business" endorsement for nonprofit organizations only Coverage is amended to include the chairman and members of the committees identified in the endorsement schedule They are only covered when performing services for the insured as members of the identified committee Include Specified Non-Compensated Officers as Employees (CR 25 08) When this endorsement is attached to the policy, the noncompensated officers whose names or titles are shown in the endorsement schedule are included as employees. Include Volunteer Workers as Employees (CR 25 09) This is a "class of business" endorsement used only if the insured is either a nonprofit organization or governmental entity The definition of employee will include uncompensated individuals performing duties: o usual to employees, or o acting as funds solicitors during fund-raising campaigns 13
ISO ENDORSEMENT OPTIONS Include Volunteer Workers Other Than Fund Solicitors as Employees (CR 25 10) This is a "class of business" endorsement used only if the insured is either a nonprofit organization or governmental entity The definition of employee will include uncompensated individuals performing duties: o usual to employees, EXCEPT o acting as funds solicitors during fund-raising campaigns Include the Spouse and Children of Building Manager, Superintendent or Janitor as Employees (CR 25 11) This is a "class of business" endorsement used only for insureds that are real estate management companies Employee includes the spouse and children over 18 years of age who reside with an employee who is a building manager, superintendent, or janitor. Each family is considered to be a single employee However, the coverage can be canceled on individual members of the family 14
ISO ENDORSEMENT OPTIONS Amend Definition of Employee To Comply with Labor-Management Reporting and Disclosure Act of 1959 (CR 25 15) This is a "class of business" endorsement used for a labor union. The definition of employee is amended to include: o Noncompensated officers o Noncompensated dues collectors o Shop stewards o Shop chairman o Directors or trustees acting as members of committees elected or appointed by the board of directors or trustees to perform specific functions. Add Faithful Performance of Duty Coverage (CR 25 18) This is a "class of business" endorsement for fraternal orders or labor unions whose bylaws or constitution requires purchase of faithful performance of duty coverage This endorsement adds coverage for loss of money, securities, or other property caused by failure of an employee to faithfully perform duties prescribed by the insured organization's constitution and by-laws or resolution of its governing body Coverage is not limited to loss from theft; it also applies to loss from failure to faithfully perform as a result of error or oversight or some other cause. Coverage also includes loss resulting from inability to faithfully perform duties because of a criminal act committed by someone other than an employee. 15
ISO ENDORSEMENT OPTIONS Clients' Property (CR 04 01) The endorsement adds coverage for loss of or damage to money, securities, or other property suffered by a client of the insured as a result of theft by an identified employee of the insured Coverage applies to property owned or leased by the client and to property held by the client for others, regardless of whether the client is legally liable for the loss. 2. The Ownership of Property; Interests Covered Condition is replaced by the following: The property covered under this Insuring Agreement is limited to property: a. That your "client" owns or leases; or b. That your "client" holds for others whether or not your "client" is legally liable for the loss of such property. However, this insurance is for your benefit only. It provides no rights or benefits to any other person or organization, including your "client". Any claim for loss that is covered under this Insuring Agreement must be presented by you. Insuring Agreement: The following insuring agreement is added to Section A. Insuring Agreements: We will pay for loss of or damage to "money", "securities" and "other property" sustained by your "client" resulting directly from "theft" committed by an identified "employee", acting alone or in collusion with other persons. 16
ISO ENDORSEMENT OPTIONS Clients' Property (CR 04 01) (continued) Definitions: o The term "client" is defined as an entity for whom the insured performs services under a written contract o The definition of "theft" is replaced and amended as the unlawful taking of property to the deprivation of your "client" 17