Dear David: How Does Insurance Cover Employee Theft?

Every industry needs knowledgeable professionals. C&R’s commitment to keeping professionals informed inspired this monthly column, “Dear David.”  This column gives C&R subscribers knowledge in an area that touches almost every aspect of the work they do: Insurance.

“Dear David” gives readers the opportunity to ask insurance and risk management related questions to someone who is not selling insurance products. These questions can focus on all manner of claims, the structure of an insurance program, risk management techniques, safety, various aspects of compliance, and so much more. 

Taking another example from the October issue of C&R, “Are Your Profits Being Stolen?” by Sean Scott addresses a struggle familiar to all business—theft. The article identifies different theft types, and some strategies to combat it. But what role could insurance play?

Dear Stolen Profits, 

It seems that theft plagues every business, in every industry, and mitigating its severity is a worthwhile endeavor. Some theft types could be covered by Commercial Crime Coverage and others by an Inland Marine Equipment/Installation Floater. But for purposes of this article, how does insurance coverage address employee theft? 

Insurance coverage addresses employee theft of money in two categorical ways. One category is “Loss Sustained” and the other is “Discovery.” Each category speaks to the method by which the coverage is triggered under the terms of the policy and how the coverage responds to a loss. “Loss Sustained” policies provide benefits narrowly for losses incurred during the policy period. While “Discovery” policies provide broader benefits for the total amount of the loss incurred once the loss becomes known to the insured. 

Regardless of the coverage category, the insuring agreement in an “insurance services office” coverage form for employee theft states:

  1. Insuring Agreements
  2. 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 purposes of this insuring agreement, “theft” shall also include forgery. 

Words that appear in quotes have special meaning under the insurance policy and can be found in the definitions section. For our purposes, the conventional understanding of these words will do, but in a true analysis of coverage—definitions matter! 

To analyze coverage, we need facts and, in this case, we will use some hypothetical facts. Let’s say your project manager gets to know a supplier. One night they meet and decide the supplier will provide false invoices for jobs being ran by the project manager. It starts small, a few hundred here, a thousand there. Overtime they take larger sums, five-years later they have collected $300,000. Fortunately, the owner was completing an inventory for a job and things did not add up. This claim is covered, right? Well, it depends. 

Starting with insuring agreement above, it seems an opportunity for coverage does exist because it was a loss; of money; resulting directly from theft; committed by an employee. But what about the policy exclusions? In this hypothetical the loss was discovered wholly by taking inventory for a job. The inventory exclusion states: 

  1. Insuring Agreement A. 1. does not cover: 
  2. Inventory Shortages

Loss, or that part of any loss, the proof of which as to its existence or amount is dependent upon: 

(1) An inventory computation; or
(2) A profit and loss computation.

However, where you establish wholly apart from such computations that you have sustained a loss, then you may offer your inventory records and actual physical count of inventory in support of the amount of loss claimed. 

Lots of adjusters make the mistake of thinking that because inventory is involved in the discovery of the loss that this exclusion applies. They often overlook the exclusion’s exception. Additionally, adjusters may not know how to coach someone through different methods to investigate the situation.  The focus of the coverage investigation should be to find evidence in support of coverage applying to the loss.

How could one prove up this claim? Here are a just a few ideas. 

First, looking at the invoices the supplier provided to other project managers. It can take a bit of forensic digging to find how the theft was committed but the numbers are possibly off. 

Second, looking at the suppliers bills of lading or shipping manifests to see if those tie out to the invoicing provided by the supplier. Load and count are vital numbers in the transportation industry.   

Third, involve the police—this is theft after all. Perhaps a confession could occur or a sting.  

Lastly, contact someone in leadership at the supplier and without making direct allegations—inquire about the discrepancies in the invoices or inventory. 

Recall the two categories for coverage – “Loss Sustained” or “Discovery.” These matter when it is time to get paid. Out of our $300,000 that was stolen, in a “Loss Sustained” coverage the benefit under the policy would only be the amount stolen during the policy period subject to the deductible. Under the “Discovery” coverage form, the insured could have broader coverage that picks up the full $300,000 loss over the past five-year period. 

While Commercial Crime Coverage has two categories, each category has three sub-groups. These sub-groups speak to how the coverage form interacts with the rest of the insurance program to which it is attached. Whether it is a part of a package program, monoline, or limited to only two insuring agreements for employee theft and forgery. In the package or monoline subgroups additional insuring agreements are contained in a Commercial Crime Coverage. Common insuring agreements can include things like, Employee Theft, Forgery or Alteration, Inside The Premises-Theft Of Money and Securities or Robbery Or Safe Burglary, Outside Premises, Computer Fraud, Funds Transfer Fraud, and Money Orders and Counterfeit Money. 

What is the practical lesson here? First, check out Sean Scott’s article and consider the advice he shares about mitigating the different types of theft a business can experience. Second, think critically about the type of insurance program you purchase. If you only explore price, the true value of the coverage will never be known. Insurance is not fungible—no two insurance carriers offer the exact same coverage. 

David Princeton

David Princeton, CPCU, AMIM, AIC, CSRP, is the principal consultant of, an expert witness, and contributing author of Be Intentional: Culture. He attends Marquette University Law School and previously served as a director of corporate risk and as a lead claim specialist.

Advocate Claim Service takes the anxiety out of claims. Our mission is the strategic presentation of claims to get policyholders the benefits owed under an insurance policy. Claim consulting services are provided to Policyholders, Brokers, and Attorneys. As licensed insurance professionals, we have over 35 years of insurance claims experience across a wide array of coverage lines. In addition, our Insurance and Risk Management consulting practice is well suited to provide clarity to just about any insurance program before a loss occurs.

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