Fidelity / Crime Insurance - Discovery vs. Loss Sustained Coverage
By Rehana Moosa
Businesses change insurers for a variety of reasons, from lower insurance premiums to better coverage for changing risks and needs.
The impact of switching insurance companies can be complicated in cases involving fidelity / crime insurance claims. This is because with fidelity claims, losses can span multiple years (and therefore policies), requiring more analysis in terms of how the claim is filed and with whom.
For example, ABC Ltd. is a manufacturer of widgets, located in Winnipeg. ABC Ltd. had a fidelity / crime policy with Save Money Insurance from 2010 to 2018. In 2019, ABC decided to switch to Better Insurance to benefit from lower premiums.
On March 31, 2021, ABC’s controller discovers that a warehouse supervisor has been misappropriating inventory since 2016. The controller estimates that $1 million in inventory has been taken, broken down as follows:
When ABC files its fidelity claim, what portion of its losses would be covered by Better Insurance? The answer is that it depends on the type of coverage ABC holds.
There are two types of wordings in fidelity policies that deal with the length of time that losses will be covered (referred to as the “indemnity period”).
The first type of wording is known as “discovery coverage”. Under this coverage, all losses will be covered, from the beginning of the misappropriation to the date it was discovered, as long as the misappropriation was discovered during the current policy period. Coverage applies even if the insured had a policy with a different insurance company during the time the fraud occurred.
The second type of wording is known as “loss sustained coverage”. Under this wording, the policy will only cover losses that occurred and were discovered while the insured’s current policy was in effect, or within one year of its expiration.
The illustrations below highlight the differences between the two types of wording:
Going back to our example, if ABC’s fidelity / crime policy had discovery coverage wording, Better Insurance would cover all losses from the date the fraud commenced. In this case, ABC’s claim would total $1,000,000.
However, if ABC’s fidelity policy had loss sustained coverage wording, Better Insurance would only cover the losses that occurred while they were the insurer, and ABC’s claim would total $270,000, the losses from 2019 to 2021.
It is important to note that under the loss sustained wording, if the policy that was in effect when the misappropriation occurred has expired, it is possible to recover a reduced amount under your current policy as long as fidelity / crime insurance coverage has been continuously maintained.
As this example illustrates, the type of wording in a fidelity / crime policy can make a significant difference in terms of the losses an insured can recover. For this reason, it is important to understand the wording in your fidelity / crime policy, and the impact it may have in the event of a claim.
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Communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. For permission to republish this content, please contact Rehana Moosa Forensic Accounting Professional Corporation.
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