Do traditional Crime policies actually cover the risk that is understood under the contract? What are the risks for a client in buying off the shelf policies to meet the contractual requirements?
When speaking to our clients (contractors) who are working with organizations from countries such as USA, UK and Germany we are seeing more and more requests within the contract for Crime Insurance alongside the usual Professional Indemnity and General Third Party Liability insurances. Do traditional Crime policies actually cover the risk that is understood under the contract? What are the risks for a client in buying off the shelf policies to meet the contractual requirements?
What cover is implied by the contract?
Whilst the wording of the contract clauses is usually broad in its intent, we can infer that that the main purpose of the requirement is that if a member of staff of the contractor steals from the main organization then the organization will expect the contractor’s insurance to pay for the damage to the organization. It seems to be a pretty clear requirement and not particularly onerous, but how can it be covered?
What is in a Standard Commercial Crime Policy?
Traditionally a crime policy is for the protection of a client’s own assets, they are specifically set up to protect against a direct financial loss to the client due to the actions of both their employees and third parties. The cover can be broad in terms of protection of the client’s own assets (direct financial loss) but when it comes to actions against a third party then it becomes a more difficult proposition.
Typically Direct Financial Loss is not defined within the policy, but is an understood legal term for the loss of a clients own cash, securities and tangible property. So, in the case of an employee stealing from a client then we are in an area which is not covered under the main clauses of the policy.
What options are available?
In older crime policies there is no cover as required under the contract so they are not really useful, unless the client has large assets or holds large amounts of cash. In this case we need to ensure the cover is fit for purpose and not just a box ticking exercise as crime is a very expensive insurance in comparison to the other covers typically requested.
In more modern Crime polices there will usually be an optional extension for liability to a client. This will provide the cover needed under the contract but must be requested and checked to ensure it has no exclusionary language for territory or actions of the client. This extension will also typically exclude any actions which are in collusion with the organization’s staff which could lead to insurers trying to pass on the liability to the organization which could cause embarrassment for the client.
A neat way of creating the cover is to add the liability to the Professional Liability through a Dishonesty of Employees Extension. This is a clause designed to bridge the gap between the PI and Crime policies for the acts described above due to the Crime being designed to cover Direct Financial Loss (being akin to a property policy really) and not for legal liability. The clause gives cover to –
‘indemnify the Assured against all sums which the Assured shall become legally liable to pay as a result of any Claim or Claims made against the Assured during the Period of Insurance brought about or contributed to by any dishonest, fraudulent, criminal or malicious act or omission of any employee of the Assured.’
This would fit the presumption of the contract, albeit not providing the cover for the client’s own assets.
What difference does it make as to which is chosen?
Generally the main difference is that the cover given in the Professional Indemnity is a better fit for the client as it covers the implied contractual requirement most closely. The Crime work around does give good cover but does leave it more open to disputes where there is collusion.
The costs associated with the two options mean that where the crime can be incorporated into the Professional Indemnity these will be reduced significantly. Crime cover is typically the most expensive per million out of the standard contractual insurances, sometimes adding half the cost in total. Professional indemnity insurers will seek to charge for the extension, but not to the same level as a full crime policy. It is also usual for the crime deductible (franchise) to be higher than the Professional Indemnity as well.
Are there any other reasons for Crime Insurance being requested?
Sometimes the Crime cover is requested as a fall back in case a large fraud at the contractor causes them to cease trading. Contractors in the main are smaller than the organizations that they are working with and so have more exposure to shocks such as large internal frauds. In the case of a loss of $ 1.000.000 a lot of contractors would find it difficult to continue to pay wages, costs and taxes which could lead to a failure of the contract as people leave and / or the company is forced into receivership. The clause is thus to protect the organization from shocks to the contractor in this case.
It is therefore important to understand what the contract is seeking as there can be major reasons for a full Crime policy, but in the main the organization is seeking to protect itself from theft by staff of the contractor having access to their systems / premises.
The main takeaway is that we need to understand what is being sought by the organization in the contract. If it is merely to ensure they are protected from theft when giving access or through products bought (software for example) then we can look to provide cover which does this through a Professional Indemnity policy. If it is more for a catastrophic loss and inability to trade then we probably still need the Crime insurance as well.
It has been more and more standard in Professional Indemnity for Tech firms to include the Dishonesty Extension due to these requirements so a strong Tech Professional Indemnity policy tends to be sufficient for Tech contracts. For other professions it is more optional, but still usually available on the market.
I would note that the most common claims we see from Central and Eastern Europe are crime claims so it is always important to cover this area when a company gains critical mass, but for small entities needing insurance for contractual purposes then these work arounds can save money.
Group Practice Leader Financial Institutions
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