What Is Crime Insurance and How Does It Work?

Crime insurance offers businesses and organizations financial protection against losses stemming from criminal acts. These policies are designed to cover risks like theft, fraud, and embezzlement, which are not addressed by general liability or standard property insurance. This specialized coverage helps businesses recover from financial setbacks caused by dishonest employees or external criminal activities.

Types of Covered Losses

Crime insurance policies cover financial losses from various criminal acts. Employee dishonesty or theft protects against fraudulent acts by employees, such as embezzlement, theft of money or property, or forgery. This includes scenarios where employees steal cash, inventory, or divert funds. Coverage extends to criminal activities by:

• Temporary employees
• Seasonal laborers
• Contractors
• Volunteers
• Board members
• Trustees

Forgery or alteration coverage addresses losses due to forging or altering financial instruments like checks, drafts, or promissory notes. This protection is for businesses that handle numerous transactions and negotiable instruments. Coverage for the theft, disappearance, and destruction of money and securities protects against losses of cash and valuable papers, whether on business premises, at a financial institution, or in transit.

Robbery and safe burglary provisions cover losses of money and property from forceful taking from a person or theft from a locked safe or vault. This also includes damage to premises or safes during such incidents. Computer fraud coverage addresses financial losses from fraudulent entry or alteration of data within a computer system. This coverage focuses on direct financial loss from computer misuse, distinct from broader cyber liability insurance.

Funds transfer fraud covers losses from fraudulent instructions to a financial institution to transfer funds, often initiated through phishing or business email compromise. This coverage reimburses victims when funds are unlawfully transferred from their accounts. Some policies also offer third-party crime or social engineering fraud coverage, protecting against losses caused by external parties deceiving employees into transferring funds or divulging confidential information.

Key Policy Features

Understanding policy features helps businesses maximize protection. Policy limits define the maximum amount an insurer will pay for a covered loss. Deductibles represent the amount the insured must pay out-of-pocket before coverage applies. While deductibles apply per loss, a series of acts by the same individual or group may be treated as a single loss.

The discovery period refers to the timeframe after policy expiration during which losses that occurred during the policy period can still be discovered and reported. This extension is around one year, allowing for detection of crimes not immediately apparent. Crime insurance policies are offered in two primary forms: “loss sustained” and “discovery” forms. A “loss sustained” form covers losses that occur and are discovered during the policy period, or within the extended discovery period after policy expiration.

A “discovery” form covers losses discovered during the policy period, regardless of when the criminal act took place. Shifting between these forms or insurers without careful planning can lead to coverage gaps, making continuous coverage with consistent terms advisable. Policies also contain exclusions, which are specific situations or types of losses not covered, such as crimes committed by business owners, indirect financial losses like business interruption, or inventory shortages not directly attributable to a covered crime.

Who Benefits from Crime Insurance

Many organizations benefit from crime insurance. Businesses of all sizes, from small enterprises to large corporations, face financial risks from internal or external criminal acts. Employee theft and fraud can disproportionately impact smaller businesses, as they may have fewer resources for extensive internal controls. Premiums for crime insurance are deductible as ordinary and necessary business expenses for tax purposes.

Non-profit organizations also benefit. They can be vulnerable to internal fraud due to reliance on volunteer staff, less stringent internal controls, or limited resources for robust financial oversight. The Employee Retirement Income Security Act of 1974 (ERISA) mandates that individuals handling funds for qualified employee benefit plans must be bonded, a requirement often fulfilled through a commercial crime policy.

Financial institutions, such as banks and credit unions, have specialized crime insurance needs. These are addressed through “Financial Institution Bonds,” which provide coverage tailored to the unique risks in the financial sector, including large-scale fraud and sophisticated criminal schemes. Any entity handling money, securities, or valuable property, or engaging in significant financial transactions, can mitigate substantial financial damage by obtaining this coverage.

Securing Coverage and Filing a Claim

Obtaining crime insurance involves working with an insurance broker or agent who can assess a business’s specific risks. This process includes a detailed risk assessment, where the insurer evaluates factors such as company size, industry, access to cash or high-value items, and existing internal controls. Based on this assessment, the policy can be customized to align with the organization’s unique exposures.

When a loss occurs, filing a crime insurance claim involves several steps. Immediate reporting of the incident to the insurer, and to law enforcement if criminal, is important. Prompt notification initiates the claims process and helps ensure validity.

Thorough documentation of the loss is required, including evidence such as financial records, inventory statements, surveillance footage, and police reports. This information helps the insurer verify the loss and its cause. The insurer will then conduct an investigation to authenticate the claim, which may involve reviewing documentation and interviewing relevant parties. Once the investigation is complete and the claim is approved, the policy payout process begins, reimbursing the insured for covered losses up to the policy limits.