What is Crime Insurance?
Crime insurance, also known as Commercial crime insurance, is intended to cover the losses suffered by an organization as a result of damage, destruction or disappearance of its own property resulting directly from a crime insured under the terms and conditions of the policy. For a crime to be covered under crime insurance, it should be a result of the employees of the business and third parties outside the organization. In simple words, crime insurance covers the losses caused to the insured by their employees or any third parties but not the losses caused to the third party or employees by the insured employer.
We can see many instances where the employees of an organization are involved in the embezzlement of funds which is considered employee fidelity and is covered in the crime insurance policy. There is recent news in the media where a person was engaged in a dishonest act by including the name of his wife in the employee list before sending it to the accounts team for salary processing wherein in reality his wife is not employed in the organization.
He also admitted to inflating his salary before sending his monthly salary details to the accounts team for processing. The crime was unearthed after a period of 10 years and in this period of time, he managed to embezzle nearly 10 crores of money thereby causing huge loss to the company. These kinds of acts could damage the reputation of the organization as well and crime insurance could help them recover to a certain extent.
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Important terms in Crime Insurance:
1) Property means only tangible assets such as computers, safety vaults, lockers, equipment, inventory, storage media, etc., only to the extent that it has some intrinsic value attached to it and it should be on the premises of the insured. The property does not include cash, valuables, offices, or real estate of the insured.
2) Any other person means a natural person who is not a partner, director, employee, or trustee of the insured and who does not provide products or services to the insured under a written or implied contract for services with the insured and who has not entered into any arrangement with an employee to commit fraud.
3.) Fraud means any:-
- forgery or valuables or cash only committed by the employees of the organization.
- Dishonest, fraudulent, or malicious acts committed by the employee or the business with an intention to cause a loss to the insured business owner and obtain financial gain from such losses directly or indirectly and such act is punishable under the local laws.
- Fraudulent use of a corporate credit, debit, or charge card issued to the Insured or an Employee of the Insured for business purposes when such card is counterfeit or subject to forgery, provided that the Insured and the Employee have fully complied with the terms, conditions or other terms under which the card was issued and provided that the Insured was legally liable for such loss.
4) Fraudulent alteration is altering the cheque materially by any unauthorized third parties with the intention to cause loss to the insured.
5) Internal crime means any crime committed by the employees of the organization solely or jointly with other employees including fraud, criminal activity, or theft with an intent to cause loss to the organization.
6) External crime means any crime, or fraudulent act committed by third parties who are not the employees of that business. External crime includes theft, fraud, criminal activity, forgery, burglary on and off-premises or whilst in transit, faked instruments, counter fittings, computer fraud, and money transfer fraud.
7) Discovered or discovery means the time when any executive of the organization becomes aware of the loss or fraud committed in the organization by an employee or by a third party even though the exact amount of loss is unknown. The time of discovering the loss is important as it is the point to decide whether the discovery happened during the policy period or after the policy period.
8)Discovery period is the period immediately succeeding the last date of the policy or the renewal date of the policy where the insurer has been notified of the crime committed by an employee or a third party. Also, the time of the crime should be during the policy period and the discovery is made for the subsequent time period. In the event of non-renewability of a crime insurance policy by the insured, an automatic entitlement of up to 30 days would be available to the insured during which they could notify the insurer of a claim or loss covered during the policy period.
9) Loss means direct financial loss suffered by the insured customer arising out of single or multiple fraudulent acts of the employees or third parties. The loss could be due to a single event or multiple events or a series of continuous events which are related to each other.
10) Subsidiary means an entity in which the insured has control over the composition of directors directly or through other controlled subsidiaries, controls more than half of the shareholder or equity voting rights, has more than half of the issued share capital in their name, and exercises effective control of management including the joint ventures.
11) Employee means:
- Any person who works for the insured, as long as the insured retains the right to direct, supervise and monitor such a person. This compensation may be in the form of a salary or a periodical bonus.
- Directors, partners, officers, and trustees who perform the role of an employee as specified above. If the executives are performing the duties of an employee at the time of the crime, then such crimes would be covered under the policy.
- Any employee who left the organization would be covered for a period of 60 days from the date of their termination from active service or resignation from their duties except in case the employee is terminated for suspected fraud or a dishonest act.
What is covered under Crime Insurance?
1) Employee Dishonesty: Crime insurance covers the dishonest acts of the employees of the insured and acts such as money embezzlement, theft, or forgery by the employee with an intention to cause loss to the insured are included. It also includes fraud committed by the employees with third parties to cause loss to the management. For instance, if an employee fraudulently embezzled funds to their own account without the knowledge of the employer and in the process causes losses to the employer, then such crime would be covered in a crime insurance policy. This section covers the dishonest acts of the employees only and not the acts committed by the third parties resulting in a loss for the insured employer.
2) Premises cover: This section covers the losses to the business owner due to criminal acts committed by third parties. The loss could arise out of destruction, the disappearance of funds or property, wrongful abstraction, or theft of money and other securities by any third party from the insured’s premises without the knowledge of the insured. Here the term premises means any land or building owned and occupied by the insured only to carry out their regular business activities. The third party would be any natural person who is not an employee of the organization acting on their own and conspiring with the employees of the organization to commit fraud. A third party could also be a person with whom the organization is carrying out business activities.
3) Transit cover: Transit cover in crime policy is designed to cover the losses arising out of destruction, theft of money and securities by a third party outside the premises of the business. Transit cover is mainly used to cover the transit of money from one place to another by business owners. For the transit cover to be applicable, the insured should make sure that the valuables are being carried by authorized employees in an armored vehicle and such vehicle should not be a personal vehicle or postal vehicle. This cover is very useful for businesses dealing in cash or securities and it involves the transfer of cash from one location to another. It is to be noted that this section covers the loss of the property by a third party only and not by an employee and that too the loss should happen outside the premises of the business.
4) Computer fraud cover: Computer fraud cover is designed to cover the computer fraud committed by a third party resulting in loss to the insured. This section includes unauthorized gain by a third party and committing fraud resulting in loss to the insured business owner. For example, if a third party gains access fraudulently to your computer and commits modification or deletions of electronic information such as bills payable to the business leading to a loss for the business owner.
5) Depositors' forgery cover: This section covers the losses to the insured arising out of fraudulently drawn cheques in the name of the insured by a third party. Forgery is when a third party has altered or modified a negotiable document relied on by the insured to cause a loss. This section covers only the fraudulent activities committed by a third party and excludes such acts committed by the employees of the insured business. For example, if a third party has made your sign on your cheque or altered the amount on the cheque wilfully to cause loss to you is covered under depositors forgery cover.
What are the exclusions under Crime insurance?
- Any loss arising out of employee fraud or crime by an employee who has a history of committing such fraud is still employed in the organization.
- Negligence or omissions that cause direct or indirect loss to the Insured.
- Losses due to acts committed by shareholders directors or other executives unless they are performing the duties of an “employee”.
- Losses arising out of direct or indirect acts of the major shareholders of the business. Major shareholders are those who own more than 10% of the share capital or issued voting rights.
- Losses resulting from theft or fraud committed by the business partner except when they are acting as an employee.
- Consequential loss or of a similar kind.
- Loss of life caused by radiation or pollution.
- Losses incurred in the reproduction of any information that is contained in the damaged manuscripts, records, or accounts.
- Losses caused by civil war, commotion, rebellions, military or government action.
Add-ons in Crime insurance:
- Recovery costs: Recovery costs arising from the loss covered under the terms and conditions of the policy are payable in the crime insurance policy on payment of additional premiums. There could be recovery costs for the losses arising out of depositors' forgery, computer fraud, etc. requiring the insured to restore the documents or computer to their original condition.
- Computer system reinstatement costs: The computer system reinstatement costs include the costs incurred by the insured in reinstating the computer system affected by fraud committed by a third party or employee fidelity or electronic fraud. The loss should result in damages to the insured and require reinstatement to function properly.
- Fines, penalties, or damages: The policy would also pay for the fines, penalties, or damages for which the insured is made legally liable arising out of employee fidelity or third-party acts except for direct compensatory damages. Fines and penalties could be levied by the government or competitive authorities for the dishonest acts committed by the employees of the insured organization for which the insured is held legally liable to pay the damages.
- Care, custody, and control: Losses arising from the theft of money, securities, or any other property belonging to the third party which is held in the control, care, and custody of the insured at the time of the loss for which the insured is legally held liable. This section covers the losses or damages incurred by the insured due to theft of third-party property which is held in the care, custody, or control of the insured for which the insured is legally held liable.
- Legal fees: Losses covered under the policy may result in a lawsuit or legal proceedings for which the insured might be made liable legally and any such expenses incurred by the insured to defend such claims or lawsuits are covered under the crime insurance policy.
- Automatic cover for new subsidiaries: If at any time during the policy period, the insured acquires or creates a new entity, then subject to the terms and conditions of the policy such subsidiaries would be covered solely for the loss sustained after acquisition or creation of such entities.
- Runoff cover for prior subsidiaries: If during the policy period, a subsidiary ceases to be a subsidiary of the business of the insured, then the coverage under the policy would continue till the end of the policy period or till the end of any applicable extended discovery period with respect to the loss which was sustained or allegedly sustained during the period the entity was a subsidiary of the insured.
Advantages of Crime Insurance:
- Affordable premiums: Premium in crime insurance depends on the type of business, number of employees, revenue generated by the entity, industry type, business location, and subsidiaries of the business. Despite a large pool of benefits in crime insurance, the premium is quite low and affordable even to small businesses in India. The premiums for this coverage if taken as a separate policy would cost more than the bundle.
- Covers dishonest acts of employees: Employee dishonesty is a major issue for any organization. Having a crime insurance policy could help employers to a certain extent recover their losses arising out of dishonest acts committed by their employees. The other issue in the dishonest acts is that they might be unearthed after a long period of time due to which the losses could have been compounded, reaching a stage where the recovery was inadequate. In such cases, the crime insurance policy would compensate the insured customer for the losses suffered by them due to employee dishonesty.
- Internal and external risks cover: Internal risks are those which are resulting from within the organization such as employee fidelity whereas external risks are those which are external to the organization and caused by third parties such as forgery fraud or computer fraud. A crime insurance policy would provide 360-degree protection to businesses by insuring both internal and external risks.
- Legal costs are covered: Businesses could incur legal costs from the lawsuits filed on them for any of the internal or external risks experienced by them. For example, a dishonest act committed by the employee of a business might lead to a lawsuit filed against the business by a customer of the business for which the business entity would be held legally liable. Crime insurance policy would cover the legal costs incurred by the insurer business in fighting such legal cases against them due to an internal or external risk.
Factors to consider before taking Crime insurance:
- Claim settlement ratio: The most important thing to consider before taking any insurance policy is to check the claim settlement ratio of the insured as it indicates the claim settlement capacity of the insurer. The higher the claim settlement ratio, the higher would be the chance of getting your claim settled by that insurer. The claim settlement ratio is measured by the total number of claims that are settled to the total number of claims that are received in a particular policy period. So for the claim settlement ratio to the higher, insurers have to settle a higher number of claims during that particular period. In general claim settlement ratio is taken every financial year and the claims received till the last month of that year are included in calculating the ratio.
- Insurance intermediary: Crime insurance is one of the most complicated insurance plans in the market as it comes with intricate terminology that would be strenuous for a small and large business owner to understand. This is where the insurance intermediary might help small and large business owners by bringing in their knowledge of the insurance product that can explain crime insurance in the simplest way.
- It cannot be said that all insurance intermediaries would have the same knowledge when it comes to commercial insurance products as the knowledge would develop over a period of time and it comes with their experience of dealing with such products. Individual agents are less likely to deal with such products on a day-to-day basis and therefore might not be on par with insurance brokers who deal with such complicated products on a day-to-day basis. An insurance broker would be the apt intermediary to go with if you are considering a crime insurance policy. For more information on crime insurance please get in touch with Bima Kavach.
- Correct declaration of details: Never think of cheating an insurance company by providing incorrect details to gain an undue advantage as it could backfire. The other utmost important thing to remember while taking crime insurance is to provide the correct declaration in the proposal form. A proposal form is a kind of declaration given by the insured customer mentioning the details of the risk to be insured. The insurance company would decide on the acceptance of the proposal based on the details submitted by the insured customer and then calculate the premium accordingly. If false details are submitted by the customer at the time of taking the policy, it could result in policy cancellation or rejection of the claim as this act of the customer violates the basic principle of insurance i.e. utmost good faith which states that the insured should have revealed all the correct information at the time of taking the policy.
FAQs in Crime Insurance:
- What are the documents required at the time of claim in crime insurance?
At the time of claim settlement insured should submit the following documents:
- Duly filled and signed claim settlement form which contains the details of the loss, occurrence of an event, etc.
- Policy investigation report and First information report (FIR).
- Internal investigation report, if any as this would serve as first-hand information on the quantum of loss.
- CCTV footage depicting the event.
- Termination letter of the employee from active services.
- Any other documents as required by the insurer.
2. Do small and large companies require crime insurance?
Yes. Irrespective of the size of the company, every company should take a crime insurance policy. One cannot guarantee that their employees would not engage in fidelity and there would be no risks from third parties while carrying out business. So, it is advisable to take a crime insurance policy for small businesses in particular as they may not be able to deal with heavy losses such as big thefts committed by their employees due to their limited resources.
3. Is damage to a third party by a business covered in crime insurance?
No. Crime insurance covers the loss to the insured by a third party and not vice versa.
4. What if an employee commits theft in the company?
Employee theft would come under fidelity which is covered under internal risk in the crime insurance policy.