What To Look For In A Fidelity / Crime Insurance Policy

Rehana MoosaBy Rehana Moosa

Imagine you are a business that uses independent contractors to provide services to your clients instead of employees.  The contractors prepare daily timesheets, recording the hours spent working with clients and travel time.  The timesheets are used to determine the amount of compensation paid to each worker.


The organization later discovers that several workers have overstated the number of hours they worked on their timesheets, and received higher compensation than they were entitled to.


The organization tries to file a claim under their fidelity insurance policy.  Unfortunately, they realize that their policy specifically excludes losses caused by independent contractors.


This example highlights the importance of reading your fidelity policy carefully, and ensuring that you understand the coverage, and its potential impact on any future claims, given your business’ operations. 


Below, we discuss a few key sections of fidelity policies and the elements you should look for in a policy, whether you are buying one for the first time or looking to review your current one.


Definition of an Employee


Fidelity policies only cover losses caused by an employee and will define the types of workers who are covered.


Generally, an employee is defined under a fidelity policy as an individual:


  • Who is in the regular service of the insured
  • Whose work is governed and directed by the insured
  • Who is compensated, directly or indirectly, by salary, wages and / or commissions


An “employee” can include full-time employees, as well as part-time, seasonal, and temporary employees.


Fidelity policies may exclude losses caused by:


  • Brokers
  • Consignees
  • Contractors
  • Agents


If your business frequently uses the services of workers who do not meet the definition of an “employee”, any misappropriation committed by those workers may not be covered under your fidelity policy.


Definition of Occurrence


Understanding the definition of an “occurrence” is important, since it determines the number of deductibles that will apply if you file a claim, as well as whether the policy limit may be exceeded.


Policies generally define an occurrence as “a dishonest or fraudulent act, or a series of similar or related acts”.  An issue arises when it is unclear what “related acts” means. 


For example, a retail store has two employees, both of whom handle cash.  Each employee, unbeknownst to the other, misappropriates cash by recording fake returns.  Would this be considered one occurrence or two?  The acts are similar, in that the misappropriation scheme is the same.  However, the employees are not colluding with each other and are carrying out the scheme independently.


In situations such as this, the ultimate decision as to what is considered an occurrence is determined by the insurance company.  A lawyer with experience in insurance coverage can also provide insight into how the policy wording can be interpreted.


Loss Period


There are two types of wordings in fidelity policies that deal with the length of time that losses will be covered.  This wording is relevant in cases when an insured suffers a loss, but the loss occurs over several years, during which time, the insured switched fidelity insurers.  In other words, the insured had two different policies in effect during the loss 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.


Therefore, if an organization has a policy with loss sustained coverage, it is possible that some of its losses will not be covered, depending on when the current policy came into effect and when the misappropriation was discovered.




Fidelity policies have specific rules regarding how any funds recovered from the accused employee are divided between the insured and the insurance company.


Once any costs incurred to recover the funds are deducted, the remaining funds are typically distributed as follows:


  • To the insured, for any losses that exceeded the policy limit but would have been covered if the policy limit had been higher
  • To the insurance company, for the amount paid to the insured in the insurance claim
  • To the insured, for the deductible
  • To the insured, for any losses not covered under the policy


Under other policies, the insured is entitled to all recoveries first, to the extent they had losses that were not covered under the policy.  Once the insured is fully reimbursed, any recoveries remaining are given to the insurance company.

Contact us to learn more.   647-426-0146  |

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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