What Is in a Standard Commercial Crime Policy? Contractual Requirement For Insurance

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.

Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17

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Managerial Decisions Stand Trial

Looking at topics and developments that address climate change, there is no getting around the fact that we have not yet seen their peak. Our legal system requires a company’s management to exercise the diligence of a prudent – in case of a joint stock company: conscientious – businessperson.

Environmental protection and measures curbing climate change have not lost their geopolitical and socio-political relevance during the pandemic. On the contrary, from a legal point of view, the topic is more relevant than ever.

Civil lawsuits on the rise

In March 2020, the German Federal Constitutional Court confirmed that constitutional complaints against the climate protection law were, at least in part, legitimate. In April 2021, the City of New York filed a lawsuit against three large oil companies (Exxon, BP and Shell) for allegedly misleading consumers about the leading role their products play in climate change and for allegedly “greenwashing” their practices to make them seem more eco-friendly than they are. In May 2021, the Hague District Court held Royal Dutch Shell responsible for its CO2 emissions and ordered the oil and gas company to lower emissions by 45% by 2030, compared to 2019 levels. The Court stipulated that this obligation extends not only to Shell’s group operations but also to business partners, suppliers, and end users.
Although this judgement is not yet legally effective, its possible impact on future civil lawsuits in other European countries with differing legal systems can hardly be estimated. Nonetheless, it is a landmark decision
and, given the global focus on environmental protection, one will no longer be able to just rely on the fact that operating facilities have been properly maintained according to the latest technical standards.

Legal basis for claims

The Charter of Fundamental Rights of the European Union sets out environmental protection in Article 37. In terms of the Green Deal, the 27 EU member states have agreed to achieve climate neutrality by 2050. According to the principle of division of powers, each individual legislator is called upon to define the guidelines for corporate action. The Federal Constitutional Court found that the German legislator did not achieve this with the Climate Protection Law, dated 12 December 2019, and the Dutch judiciary had in fact been too quick off the mark. The advice is to focus on collaborative corporate action to achieve the 2050 climate targets, even if there is no specific legal basis yet. Because regardless of whether the decision made by the Hague District Court can withstand the scrutiny of an appeal, the respective company’s “excessive” emissions have long since attracted widespread public attention in social media news channels. The mere fact that the share price remained stable in this case should not blind us to the fact that such cases can quickly damage a company’s reputation. In this sense, reputational damage insurance is still under-exploited.
Obviously, an environmental damage does not automatically cause a damaged reputation, it can lead to pecuniary losses as well. Future cases will shed light on the extent to which companies or their representatives will be held liable for damages. Whenever a board member is held responsible due to a breach of duty, the question arises whether a pecuniary damage liability insurance is in place – in short, a D&O insurance. A textbook example for such environmental damages and their damaging corporate impact is Volkswagen’s dieselgate scandal. Insurers must pay out a combined total of 270 million EUR (328 million USD) in D&O claims to VW.

D&O Insurance and ESG criteria

Looking at topics and developments that address climate change, there is no getting around the fact that we have not yet seen their peak. Our legal system requires a company’s management to exercise the diligence of
a prudent – in case of a joint stock company: conscientious – businessperson.
The most effective way to safeguard oneself against breaches of duty and the resultant liability is a D&O
insurance, which would cover damages as well as legal costs should such a case arise. Despite increasing premiums, this insurance is a popular means because it enables heads of businesses to at least protect themselves against the consequences of their liability in case of an alleged breach of duty. Looking at common wordings used, a personal liability insurance protects individuals for the most part also in case of a claim against environmen-
tal damages. Like always, the devil is in the detail: Insurers tend to only grant insurance coverage for defence costs or in the case of damages based on liability standards as long as no accusation of a breach of duty has been made. The company’s management is therefore well advised to keep an eye on ESG criteria as well as on the development of jurisdiction in Europe and evaluate the scope of coverage of the D&O policy in case of environmental damages. The upcoming renewal phase in autumn 2021 presents an ideal opportunity to do so.
Although little knowledge seems to exist about environmental liability, this should not blind us to the fact that the number of legal proceedings regarding specific and relevant topics could pick up at any time. Prior to the onset of the current crisis no one would have thought that the Supreme Court would have to deal with two cases concern- ing a business interruption insurance due a pandemic within a very short time. However, this is precisely what happened in the first half year of 2021.

Krystle Lippert

Ralph Hofmann ­Credner

Founder and Owner HOFMANN­-CREDNER Rechtsanwalts GmbH

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Investing in the Future

With new insurers having entered the market in the past few months, we should see a dampening of the price increases we experienced in the previous two years.

The market has continued on its hard path with increases in the range of 10% to 20% for clean accounts and much higher for those considered distressed risks. Additionally, the market has been weakened by the absence of face-to-face broking due to the Covid-19 crisis.

Looking back on the past 12 months

As a result, underwriters had no need to take on additional risks and thus continued to wield the power in transactions. After 2020, premium increases of 25% were the order of the day. However, the correction on financial institutions (FI) was nowhere near as severe as in the D&O insurance sector, given the more disciplined approach in the FI market compared to other liabilities.
There is a glimmer of hope in the strong competition we encounter in the fund management market. There were hardly any corrections in Central and Eastern Europe. With London markets taking a keen interest in this region, an even greater opportunity exists to bring specialist forms to the CEE region.
While claims have been lower than usual, conversations with loss adjustors suggest that this is not a long-term trend. It is rather people’s absence from their office that has shifted the focus onto other issues. Adjustors believe that we are heading for a wave of claims coming from employee fraud and Corona- related loan issues once office work is resumed and checks are carried out more rigorously. Fraud is expected to be a major issue for FI in the coming months, especially in Central and Eastern Europe.

Emerging risks

The impact of Covid-19 will become an issue for all types of FI in the coming year. Government support has kept many businesses solvent, but inevitably this will be scaled back over the next 12 months and the losses that are in the pipeline will crystalise. This will put a great strain on banks with large lending portfolios to businesses in the more distressed industries such as aviation, tourism and leisure.

In CEE, several countries heavily rely on these industries, so there is concern as to what will come from
the insurance market. More detailed Corona-specific questionnaires will become standard for the foreseeable future along with some inevitable rate increases where exposure is felt.
A second and perhaps more long-term issue arising for FI is the recent and potential legislation around investment and lending to companies that are considered detrimental to the environment. We have seen some central banks (France, UK) conducting regular audits of these companies’ exposure within their loan books and invest- ments, seeking to quantify the exposure which could turn out to be a systemic risk. The European Banking Authority is currently also working on a common standard for comparing banks’ green assets. This may be perceived as a move towards penalising those who hold too many assets in companies that are “sensitive to transition risks”. Some believe that charging capital for these risks (due to their “systemic risk” potential) could be a way forward. It remains to be seen how this would play out, but there is a lot of noise about it.
Accompanying the investigation of assets is the EU Directive published in December 2019 which came into force this year and which deals with the disclosure obligations for financial products linked to the sustainability of the investments they contain. This points to an alarming increase of risks for FI as it involves consumer protection laws and perhaps levels of disclosure that are not immediately apparent. Could a company, which (from an outside-in perspective) does not appear to pose a risk, suddenly become risky after such an investigation due to one small subsidiary’s non-compliance? The due diligence required alone would take hours to ensure compliance with the EU Directive.

Boards under pressure

In CEE we are used to the main risks for banks in insurable terms being either credit or crime. These present most of the claims. With increasingly stringent legislation concerning environmental issues and the potential of Covid-19 fallouts, we may soon be moving towards a liability phase. The risks of falling foul of EU legislation are all too real. We therefore expect more corporate boards to be held accountable and thus increasing activity in the D&O sector. For example, can banks really avoid the risk in a region that still relies heavily on coal and aging nuclear plants for power generation? Now more than ever will D&O become a more valuable risk transfer tool to enable FI to continue acting in good faith.
Furthermore, with consumer protection regulation tightening up the disclosure of product exposure concerning ‘dirty’ investments, we will see more activists trying to dig up such dirt on investment products and attack FI. Among lobbyists, it is a known fact that banks are seen as the enemy. Therefore, a strong professional indemnity cover is a must for banks. In CEE, there have only been a few consumer actions over the past years. This may, however, increase and bring highly motivated lawyers into play.
In short, boards will come under more pressure from all angles. Lending practices will be put under the microscope after the pandemic, particularly where loan books are highly exposed to industries that have fared badly in these times. D&O will be a strong risk management tool and, like all liability insurances, the earlier it is bought, the more cover it will provide.

Looking forward – 2022

As the world returns to some sort of normal life next year, the level of scrutiny will likely reveal issues that have lain dormant for the past 18 months. On top of this, FI will face new layers of legislation. In insurance terms we expect a weakening of the hard market with rates returning to flat or low single digit increases (about 5%). Notwithstanding that, if the aftermath of the Corona crisis produces significant losses across FI (and all lines), then rates will rise above this level.
With new insurers having entered the market in the past few months, we should see a dampening of the price increases we experienced in the previous two years. Insurers will be keen to diversify their books by seeking risks in our markets. Whilst not enough to lower prices or extend the terms, it should at least provide a more stable market place.

Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17

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The Consequences of Opening Up

What does this mean for crime and D&O insurance?

As the light at the end of the Covid-19 tunnel comes into view, what can we expect when we return to the office? Unfortunately, times of uncertainty tend to also be the times of higher fraud and also times of blame.

To look to the closest analogy, we have in recent times, the 2008 financial crisis is the nearest we have to an unprecedented event such as the Covid-19 crisis. When times were good mistakes and irregularities tended to be overlooked especially in the banking sector. As the liquidity crisis started to hit home it required everyone to open their books and see what their real position was. What they saw was often a mess of poor control and lax lending / borrowing. In the good times, controls had dropped – we need only look to USA where the practice of NINJA (No Income, No Job or Assets) or Self Certified loans was running rampant leading to systematic fraud and the collapse of several famous banks in the country. In UK there was a thriving industry in defrauding banks on Buy to Let loans which also brought down some venerable old names. Generally loan fraud was running rampant in the Western banking system.

The rise of crime and D&O policies for banks in CEE

In my own experience of dealing with banks in Central and Eastern Europe this was a time of increased claims on the Crime polices of the banks, a lot of things that would be overlooked in the past were now being looked at more closely and the number of fraud claims tripled in just one year. The amounts were relatively large and showed that there had been lip service paid to lending controls and controls around accounts of wealthy clients.

There was also the first real increase in litigation against banks and commercial entities as lenders and shareholders looked for somebody to blame. When money is lost there is always someone whose fault it is, particularly when investment companies are involved. This led to the start of the interest in Directors and Officers insurance on a large scale in CEE.

So what can we expect in the coming year as the economies open up?

Given past events we would expect to see the discovery of more frauds. The average timeline of a major fraud in a bank is around 18 months, so if we look at July as being a realistic time for most controls to be released then this will mean that the whole of the Crisis from the first lockdown onwards will almost exactly match this timeline. The lack of supervision whilst working from home will have tempted some to try to defraud their employer (statistically around 0.2-0.5% of employees are committing fraud at any given time, mostly petty), combine this with the uncertainty around whether there will be jobs to return to and you have a potent mix for crime to flourish. We can also add to this the fact that desperate businesses may have been susceptible to paying ‘gratuities’ to helpful loan officers – a very common form of employee infidelity.

As businesses survey the wreckage of the past 18 months they will also have a battle for survival. Investors will try to minimize their losses and are likely to resort to litigation when there is no other option. This will likely take the form of looking into decisions made by the boards in the run up to and during the lockdowns (Did they close too early? Were they too cautious? Did they not move quickly enough to take advantage of the new normal?). It should also be remembered that Liquidators see a Directors and Officers policy as an asset of the company.

More frauds to be discovered after the Covid-19 crisis

In conclusion, if we see a similar trend as in 2008, then we will expect an increase in events which can be covered by Crime and D&O insurance. There is no reason to doubt that this will be the case as the underlying issues are similar in that a strong worldwide economy was moving towards recession and a devastating event pushed it over the edge. The liquidity crisis of 2007 onwards came from a lack of trust forming as recession started to appear on the horizon, Covid-19 struck just as the fundamentals were turning as well. Policies in boom times by their nature are more lax than desirable as we move for growth.

As Warren Buffett said: “Only when the tide goes out do you discover who’s been swimming naked.”

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Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17