Crime Insurance

Bonding and crime insurance both provide financial guarantees of human performance or indemnity payments in cases where people fail to perform honestly Fidelity bonds protect a firm against losses caused by dishonest employees. Crime insurance covers losses caused by nonemployees (the public), A comprehensive risk management plan must consider potential losses caused by human failure to act honestly, because such losses can destroy a business as surely as physical damage or liability claims. Enterprises with significant amounts of cash or valuable inventory make a tempting target for criminals. If such assets are handled by employees, an organization needs both crime and fidelity coverage.

Business organizations generally engage in large scale construction projects infrequently. Thus, most firms do not have the expertise to investigate, direct, and supervise contractors. Without adequate oversight, a multi million dollar construction project could produce substantial problems and large losses. The surety bond removes uncertainty from these transactions. The surety guarantees the contractor's performance or stands prepared to make a payment to the firm needing the construction completed.

Employees of banks and real estate firms should be familiar with the principles and vocabulary of surety and fidelity bonding. Many students have found interesting careers in the bonding/insurance industry, because the services provided by this industry are essential to the U.S. economy.

It is not a long jump from fidelity bonding to crime insurance. In essence, a fidelity bond provides payment if a dishonest employee causes a loss. Crime insurance covers losses caused by people outside the firm. Crime insurance typically covers theft (taking property without permission); robbery (taking property from a person with a threat of violence); and burglary (breaking into a premises and removing property).

The appearance of the CPP diagram reminds us that business firms can purchase crime insurance as part of the Insurance Service Offices (ISO) commercial package policy (CPP). We introduced this package policy in Chapter 18. The crime coverage forms can be purchased individually or as part of the CPP' the following perils are among 14 perils that can be covered:

• Employee dishonesty

• Forgery

• Theft, disappearance, and destruction

• Robbery and safe burglary

• Computer fraud

• Extortion

When attached to the CPP, the crime forms have their own separate declarations, their own limits of coverage, and their own exclusions. Among the more important exclusions are losses resulting from an insured's dishonesty and indirect losses.

Banks, by their nature, present a special need for crime insurance and loss prevention. Not only do they need coverage for burglary and robbery, but they also need to cover liability for property placed in their safety deposit boxes. The recent growth of automatic teller machines at remote locations has created an additional need for crime coverage. Banks may use standard policies or, through a broker, may negotiate with underwriters for individual policies suited to their needs. Banks can purchase a blanket coverage fidelity bond, which protects the bank from losses caused by any employee. Alternatively, banks can purchase a scheduled fidelity bond in which specifically named people or specific positions are identified as being capable of causing an insured loss.