Which of the following could be a custodian under the terms of a commercial crime property policy

CRIME INSURANCE

Introduction

Whether your client is a homeowner or business owner, often a sensitive and scary subject for the client is the thought of being the victim of a crime. The producer�s knowledge and guidance regarding coverage will go a long way to putting clients at ease and helping them to acquire the necessary coverage for each particular situation.

Policies Including Crime Coverage

A number of insurance policies include coverage against losses incurred due to criminal activity. We will first review the ways in which the following policies protect against loss from crime:

�       Homeowners Insurance.

�       Tenants (Renters) Insurance.

�       Automobile Insurance.

�       Property Insurance.

�       Business Interruption Insurance.

Homeowners Insurance

There are many types of crime coverage policies. One of the most common forms of crime insurance is found in homeowners insurance. This type of insurance is, in reality, a package policy with a combination of coverages. This policy typically covers the home and its appurtenant structures from a variety of perils, such as fire, vandalism, burglary, robbery, theft and malicious mischief. The property of the insured is likewise covered from these perils. In addition, the policy provides coverage for the insured�s liability arising out of the covered premises and includes benefits to cover living expenses in the event the house becomes uninhabitable due to a covered peril.

Typically, under a homeowners policy the insured premises are the residence premises described in the policy declarations. The intent of the policy is to cover losses on the described premises and not on other premises rented by the insured or on business premises.

The homeowners policy covers the described dwelling building, including additions in contact therewith, occupied principally as a private residence. This includes insurance of all building equipment, fixtures and outdoor equipment pertaining to the service of the premises while located thereon or temporarily elsewhere. It also covers materials and supplies located on or adjacent to the premises which are intended for use in construction, alteration or repair of such dwelling.

This policy also covers structures other than the described dwelling building, including additions in contact therewith, appertaining to the premises. This coverage also includes materials and supplies located on the premises or adjacent thereto intended for use in construction, alteration or repair of such structure. This coverage excludes structures used in whole or part for business purposes and structures rented or leased in whole or part.

Generally, property structures are listed and scheduled on the policy, and coverage is clearly determined by inspection of the policy�s declaration sheet. In addition, the policy covers unscheduled personal property usual or incidental to the occupancy of the premises as a dwelling.

The property must be owned or used by an insured while on the described premises, and at the option of the named insured, owned by others while on the portion of the premises occupied exclusively by the insured.

Phrases such as �household goods,� �household furniture� and the like, cover a variety of articles, as long as the articles in question are chiefly associated with the household in their general nature and use. On the other hand, coverage is normally denied where it appears that the articles in question are not ordinarily associated with the household. Objects purchased or brought on the premises after the inception of the policy are generally held to be within the coverage of the policy terms.

Floater policies and endorsements provide coverage for specific goods or classes of property which are easily moveable. Such floaters are governed by all connotations and provisions of the policy to which they are endorsed. Homeowners policies may typically cover certain types of personal property on a worldwide basis, as in the nature of floaters. Floater policies are also used to cover mobile equipment, such as cranes and similar construction machinery, and may provide at-risk coverage to both the lessor and the lessee of the equipment. However, floater policies may exclude coverage for equipment held in permanent storage.

Blanket coverages may be used to cover all items described in the policy, or the term may be used to describe a specific type of policy, such as a blanket crime policy, which covers a wide range of perils.

Reporting form policies are designed to provide more flexible policy limits than a standard policy. This is particularly helpful for insureds who have fluctuating inventories. They only pay premiums on the amount of coverage for the particular monthly period determined by a monthly inventory report, which the insured sends to the insurer.

This policy will generally limit coverage to the amount declared in the last report filed prior to the loss. Such a provision will still be operative despite the failure of the insured to file a report for the previous months in a timely manner. In such a situation, the insurer may look to the last report filed by the insured.

Policies often require that the insured take necessary steps to protect the insured property after a loss occurs. Similarly, the policy may be issued on the basis of assurances that the insured will install or maintain protective safeguards which lessen the risk of loss.

Such provisions are valid and enforceable and may require the insured to use due diligence to exercise all necessary precautions, or to use reasonable care. For example, where a burglar renders a burglar alarm inoperative, coverage will exist for the loss. The insured may be required to maintain records to show that the system was repaired.

This type of policy may exclude loss where the insured fails to exercise reasonable means to preserve the insured property after the loss. The insured�s failure to preserve and protect the insured property is generally a question of fact for a jury. However, where the insurer has the option to repair or replace the damaged property, the insured may be relieved of his duty to protect the property.

Tenants (Renters) Insurance

The tenant, or lessee, of any property has an insurable interest in the improvements and betterments that he makes to the leased premises, at least for the duration of the lease. In addition, the tenant has an insurable interest in buildings erected by him on the leased premises, even though he may be prevented from removing such buildings if they become the property of the lessor at the expiration of the lease.

A tenant may elect to purchase �tenants,� or �renters,� personal property coverage, similar to homeowners insurance coverage, only without the coverage of the structure. The renter may insure his personal property, which is incidental to the occupancy of the premises. This will include coverage in the event of loss from crime.

The insured may elect to cover �household goods� and �household furniture� as long as these articles are associated with the household in their general use. Coverage is not afforded where the articles are not ordinarily associated with the household.

Typically, this type of policy affords coverage to the personal property of others while on the portion of the premises occupied exclusively by the insured.

Automobile Insurance

Automobile theft insurance policies generally state that they provide insurance against loss resulting from �theft, larceny, robbery or pilferage.�  In addition, insurance against loss from theft is frequently provided in the comprehensive coverage provisions of liability and collision policies. Whether a covered loss has occurred will turn most often upon one or both of two factors: first, the nature of the taking, and second, the identity of the taker.

Courts have held that in determining the losses that fall within the coverage under a policy insuring an automobile against theft, the provisions of the policy are to be construed according to the natural import of the language used. Any ambiguities in such language are to be resolved in favor of the insured.

Since automobile theft policies commonly protect the insured against robbery, pilferage, theft and larceny, these coverage terms require some discussion.

�       Robbery, the courts have recognized, is a form of larceny. To recover insurance benefits for an alleged robbery of a car, all of the elements of the criminal offense of robbery must be shown.

�       Pilferage is synonymous with petty, or petite, larceny. Because of the nature of the crime of petty larceny and the restrictions with regard to value in connection with this crime, the theft of an automobile would rarely be within the scope of that term.

�       It is generally recognized that the theft is roughly, though not exactly, equivalent to a taking that would amount to the crime of larceny. To recover for an alleged theft, the insured has the burden of proving much the same facts that would be required in a criminal prosecution for larceny. Thus, the policyowner must show a felonious intent upon the part of the taker of the car.

�       The majority of courts have held that felonious intent to commit larceny is an intent to permanently deprive the insured of the insured�s car. As a result, courts have generally held that there is no theft or larceny if the alleged thief intended to return the car after using it temporarily. However, the mere fact that the taker of a car testifies that he intended to return the car will not constitute sufficient proof that the taker did not commit larceny.  

An insurer�s liability is not limited under an automobile theft policy to payment of the value of the automobile which is stolen and then recovered. It extends also to damages or losses sustained by the vehicle after it is stolen and before it is returned to the owner. Thus, if an automobile is stolen and wrecked by thieves, whether by collision or otherwise, and is rendered as having little or no value, there the insurance company will still be liable for the full amount of the loss under the theft coverage in the automobile policy.

When an insured�s automobile is damaged as a result of a collision while in the custody of a police officer who is returning the vehicle from the place where it was discovered after its theft, the insurance company is generally liable for the amount of the damage incurred, even if the policy excludes loss by collision.

Theft provisions of automobile insurance generally refer to the theft of the vehicle itself, and not to personal property contained in or on such vehicles. Coverage of personal property generally is obtained in policies other than the automobile insurance policy, such as the homeowners policy, including floaters or endorsements thereto. Personal property also may be protected under the theft provisions of business or commercial policies; however, the theft provisions of commercial policies frequently exclude coverage in situations where property is stolen from an unattended vehicle other than by forcible entry into a locked, enclosed body or compartment, as evidenced by physical signs of such forcible entry.

Commercial policies may expressly extend to the transportation of personal property or property in the custody of an employee, such as a salesperson. Often they apply only while the property is actually under the protective custody of the insured�s chauffeur or driver. Some policies apply only to the theft of the entire cargo and do not extend to pilferage.

In some instances the theft provisions of an automobile policy may also extend to the theft of property contained in the insured vehicle. Where the policy does extend to the theft of property contained in a vehicle but is unclear as to whether it applies all theft of personal property or only to theft when the vehicle itself is stolen, ambiguities will be construed in favor of the insured. As a result, coverage will typically apply where personal property is stolen from the vehicle, but the vehicle itself is not stolen.

Frequently, some policies are issued to carriers, indemnifying them from losses of merchandise arising from theft. These policies may extend only to the theft of an entire shipping package. They may exclude pilferage and theft by employees of the carrier. They may also exclude theft from unmanned vehicles, unless the vehicle is enclosed and fully locked, and there is visible evidence of forcible or violent entry.

Although automobile theft coverage customarily does not extend to the theft of personal property contained in an automobile, it often may cover �equipment� of the automobile. �Equipment� in this sense, means something designed for relatively permanent installation in the vehicle, and which cannot readily be utilized without being so installed. However, it is not limited to factory-installed equipment.

Similar to other insurance policies covering loss from crime, there generally can be no recovery under an automobile policy for a loss from a taking of an automobile if there is not proof of the existence of a criminal or felonious intent on the part of the taker. Accordingly, there is no �theft� of an automobile when it is taken by someone incapable of criminal intent, or when it is taken by someone claiming ownership of the vehicle.

Automobile theft insurance policies contain policy provisions expressly excepting particular losses from the coverage provided in the policy. A policy may specifically exempt theft from coverage when the automobile is used in an illegal activity.

Theft of an automobile through acts of a member of the insured�s own household is often expressly excepted from coverage since individuals who live in the insured�s household most often have liberal authority to take possession of and operate motor vehicles of the insured, and they have unlimited opportunity for theft of such vehicles. This exception to coverage has also been designed to prevent fraud and collusion by and between the insured and the persons in his or her household. Various factors are considered in determining whether the taker of the automobile was a member of the insured�s household. The term �household� is interpreted as pertaining to or belonging to the house or family who resides in the household of the insured. For example, a nephew or an uncle may be a member of the insured�s household even though he may not physically reside in the insured�s home.

Theft policies commonly contain provisions requiring the insured to lock the automobile when unattended or to maintain and use adequate locking devices. The insurer will not be liable for loss that occurs while the vehicle is left unlocked contrary to the policy provision. A stipulation to have and maintain a certain locking device and to �use all diligence and care in maintaining the efficiency of the locking device in locking the automobile when leaving it unattended� does not mean that the car can never be left unlocked. It does, however, require the exercise of due diligence and care that someone of ordinary prudence would exercise under the circumstances.

Leaving a car unlocked and unattended in the street for at least five minutes would breach a warranty to use all due diligence by locking it when leaving it unattended. Similarly, the requirement that an automobile be left locked when unattended is not satisfied when the automobile is locked but the key is left in the automobile. Also, leaving an automobile unlocked after dark on a city street with the motor running and the door open, although only for a few minutes, breaches the covenant to use all diligence and care in keeping the car locked when unattended. As a final example, the duty of due diligence and care would be breached if the insured fails to have a locking device repaired for an extended period of time after the device becomes broken.

Property Insurance

A person who derives a benefit from the existence of particular property, or who would suffer from loss of that property, is said to hold an insurable interest in the property. A party may only obtain a benefit from a property insurance policy if that party holds an insurable interest in the insured property.

Generally, there are two classifications of property insurance. �Direct loss insurance� offers coverage to the insured in the event of loss from damages, destruction or theft to his property. �Liability insurance� protects the insured against damages for which the insured is legally liable.

In addition to perils of fire, casualty, disaster and theft, property insurance policies, or extended coverage provisions thereof, commonly insure against �vandalism� or �malicious mischief.�  In ordinary usage, the word �vandalism� has been broadened in its meaning to include the destruction of property. Generally the ransacking and destruction of an insured�s personal property has been held sufficient to warrant recovery under a property insurance policy for damages resulting from �vandalism.�

The term �malicious mischief� has been defined as an act done willfully and intentionally. In applying this term to particular acts, �malicious mischief,� as used in property insurance policies, has been held to cover the systematic breaking of windows, doors and fixtures.

Generally, it is unnecessary to distinguish between vandalism and malicious mischief for purposes of determining coverage under property insurance policies. Some examples that have been held as constituting vandalism and malicious mischief under property insurance policies, are:

�       Damaging of washing machines in a coin-operated laundry.

�       Damaging of a roof by children throwing rocks.

�       Removal of air-conditioning units from apartments.

�       Placement of poison near feeding cattle.

�       Shooting of a dog.

�       Flooding of a building by trespassers.

Watchmen and Guards

A property insurance policy may commonly require the presence of watchmen or armed guards. The insurer may require employment of guards to protect the insured building against burglary, robbery, theft or vandalism. Some insurance policies require constant watch, while others only require guards during specific times.

Often, there are questions involving who the watchmen are, and also there are questions regarding the degree of compliance with such provisions. There are questions of what constitutes a �continuous watch� or a �night watch.�

The primary and controlling issue is determining whether a person is a watchman and whether he is employed and acts as such, as required by the terms of the contract of insurance. The compensation he is paid and whether or not he is called a �watchman� are not material.

The purpose of a watchman provision in a policy of insurance is to protect the insurer from fraud and to protect the property from the peril against which it is insured, such as burglary, robbery, theft or fire.

To be considered a watchman, it is necessary that the person have the duty of watching. The mere physical presence of a person on the premises, even though continuously, does not automatically constitute that person as a watchman if he has no duty to watch. For this reason, one who sleeps on the premises is not a watchman even though stationed at a property at night.

In some policies, the obligation to maintain a watchman arises only when a plant located at the property is shut down or idle. Premises on which a large number of people are employed, but are not �open for business,� eliminate the necessity of a watchman.

A temporary absence of a watchman is sometimes held immaterial on the theory that it occurred without the knowledge or consent of the insured and that the insured had otherwise fully complied with the agreement to keep a watchman on the premises whose competency and fidelity he had no reason to distrust.

The fact that the watchman is negligent in the performance of his duty does not breach the obligation of the insured to maintain a watchman, at least where the insured has no reason to expect that the watchman would not perform his duties properly. Accordingly, a warranty that a watchman is kept on duty at night is not broken when, without the employer�s knowledge, the watchman goes to sleep during the time he should be on duty.

On the other hand, a breach of the insured�s obligation to maintain continuous watch would exist if the insured makes arrangements only for a casual or intermittent watch of the insured property.

In some instances, the policy provision requires the presence of an employee of the insured, or a �custodian,� in addition to the presence of a watchman.

A watchman is not required to have only duties as a watchman, nor is it required that only one person be the watchman. Therefore, the insured complies with the requirement of maintaining a watchman where the duty of watching is placed successively on the various members of a hired crew. Even though a watchman is not required to be exclusively a watchman, the duty of watching must be a significant part of his duties. The watchman must exercise such care and skill in the performance of his duty as are usually exercised by �reasonable, prudent and careful persons in watching similar premises.�

A watchman clause frequently may be eliminated by the payment of an additional premium sufficient to cover the risk.

Business Interruption Insurance

Business interruption insurance, sometimes called use and occupancy insurance, has become increasingly popular over the years. As the name implies, this type of insurance is designed to protect the insured from losses arising from the interruption of his or her business. If losses arise as a result of criminal activity, this type of coverage may benefit the insured.

Business interruption insurance does not have a fixed or single meaning and cannot be defined with precision. However, it may generally be described as a form of insurance designed to indemnify the insured against losses arising from the inability to continue the normal operation and functions of the business, industry or other commercial establishment. The insurer is liable, within the policy limits, for the insured�s fixed charges and expenses necessarily continuing during the period of total or partial suspension of such business due to the loss, or loss of use of, or damage to all or part of the building, plant, machinery, equipment, or other physical assets thereof, as the result of a peril or hazard insured against. However, the insurer is liable only to the extent that these expenses would have been incurred if the contingency causing the suspension had not occurred.

Particular matters or items which have been allowed as fixed charges or continuing expenses are:

�       Taxes.

�       Licenses.

�       Rent.

�       Insurance.

�       Telephone.

�       Lights.

�       Heat.

�       Power.

�       Payroll taxes.

�       Social security.

�       Payments to employees who would have been retained.

�       Association and club dues which the insured customarily paid for certain officers.

�       The expense of maintaining a branch in another city.

The following items or matters have been excluded from business interruption coverage as they have been held not to constitute fixed charges or continuing expenses:

�       Depreciation on the destroyed property.

�       Partners� drawing accounts where the insured was awarded a recovery for lost profits and such withdrawals were included in the net profit figure.

�       Labor costs which were paid as a part of the property loss under another insurance policy.

Business interruption insurance policies commonly provide that in the event of loss, the insurer would be liable for (in addition to lost profits, fixed charges and continuing expenses) expenses necessarily incurred to reduce the loss. It has sometimes been stipulated that the expenses are payable only if incurred at the written direction of the insurer. Such policies have usually provided that the insured is required to use due diligence in attempting to resume business operations.

Courts reviewing cases involving business interruption insurance have determined that the purpose of the policy is to protect the prospective earnings of the insured business. In determining the nature and extent of the business covered by the policy, the intention is to insure against loss from the interruption of the insured�s business as a whole. The recoverable losses are not confined to a particular property described in the policy or to the exact operation or business in which the insured is engaged at the time the policy is written.

Recovery has been allowed for lost profits from business activities which were commenced after the issuance of the policy and even for profits which would have been earned by a new plant structure which was not yet built, but would have been built during the suspension period. Recoveries have also been allowed where the business interruption resulted from the destruction of buildings not described in the policy but which were a part of the entire plant. Not surprisingly, business interruption insurance is also often termed �earnings insurance.�

A business interruption insurance policy is generally in the form of a rider or endorsement on a policy insuring against loss or damage to physical assets as the direct result of the perils specified: often burglary, robbery, theft or fire. Policy provisions, terms and conditions, with respect to the perils insured against and notice and proofs of loss are usually those contained in the policy to which the rider or endorsement is attached.

In the construction and interpretation of business interruption insurance, the rules applicable to all insurance policies generally apply. The interpretation must be reasonable, and the contract should be interpreted to give practical effect to the intentions of the parties. In addition, the language must be given the meaning which a person of ordinary intelligence would attribute to it. It should also be construed in favor of the insured if it is susceptible to ambiguous meanings. The loss should be determined in a practical way, having regard for the nature of the business and the methods employed in its operation.

The extent and computation of any loss which may be recovered by the insured are handled like many other types of property insurance. The insured�s accounting practices and system are not controlling in determining the recoverable loss under business interruption insurance, but they are not irrelevant and should be given such weight as practical judgment dictates.

Business interruption policies may be �valued.�  In this type of arrangement the value of the loss is agreed upon in advance, and the amount to be paid by the insurer is fixed in the language of the policy. The determination of the amount of liability is a matter of mathematical computation. Where the property is valued and the parties have agreed upon the value of the insured�s loss in advance, the amount fixed by the policy is ordinarily controlling.

In some states, laws called �valued policy statutes� provide that the amount of insurance written is to be taken as the true value of the insured property in the event of a total loss. In the case of �open policies,� the agreement of the insurer is to indemnify the insured for actual loss, up to the policy limit. The amount of any loss sustained is not agreed upon in advance. The coverage is determined by competent evidence showing the actual amount of loss. The question is one of fact, and the burden of proof of the actual loss sustained is left to the insured.

Open policies have commonly provided for the recovery of the insured�s actual loss during the time of the business suspension. Coverage includes:

�       Net profits that are not earned as a result of the loss.

�       Fixed charges and expenses that continue during the suspension period, up to the amount that they would have been incurred under normal business circumstances.

�       Expenses incurred to reduce the amount of the loss.

Profits and business expenses covered by this type of insurance should be determined in a practical way, with due regard for the nature of the business and the methods employed in its operation. In such a determination, the insured�s books and accounting systems are used to help establish the amount of regular ongoing expenses. Other evidence can also be used to help determine the amount of expenses.

Also in the determination of the loss, due consideration is given to the experience of the business of the insured before the event insured against and the probable experience thereafter. The indemnity has commonly been fixed on a daily basis of not exceeding 1/300 of the face amount of the policy or 1/365 in the case of a business which operates on Sundays and holidays.

It is frequently provided that the insurer�s liability for a partial business suspension is limited to a proportion of the liability that would have been incurred by a total suspension of business. The insurer�s liability during a time of partial suspension of business should be limited to the actual loss sustained, not exceeding that proportion of the per diem liability that would have been incurred by a total suspension of business which the actual per diem loss sustained.

There is no prescribed or accepted formula for the determination of the actual loss of net profits and business expenses covered by business interruption insurance, except the test of past experience and the probabilities of the future. All agree that the insured should not be deprived of indemnity merely because it is difficult to determine the loss with absolute precision.

Business interruption insurance policies have frequently contained coinsurance clauses, and these have been held enforceable in the absence of statutory prohibition. These, however, are subject to strict construction and the requirement of strict proof.

The period of time for which an insured can recover under a business interruption policy is primarily controlled and determined by the terms and conditions of the policy. While definite periods of time have sometimes been fixed during which the liability of the insurer would continue, the period for which an insured can recover under business interruption insurance is generally limited to the time required to rebuild, repair or replace the destroyed or damaged property with the exercise of due diligence and dispatch.

Where the policy limits the liability to actual loss resulting from a business suspension due to a specified risk, the insurer is not liable unless it is shown that the risk insured against directly produced the loss for which a recovery is sought.

It is well established that the loss of (or damage to) physical property is not covered by business interruption insurance policies. The insured must obtain that type of coverage separately under a commercial property policy. In addition, the insurer is not liable under business interruption insurance for interruption losses other than those directly caused by an insured risk. For example, an insurer is not liable for losses actually attributable to lack of demand for the insured�s product, increased production costs, unfavorable business conditions or similar business factors.

Theft Coverages

The language and provisions of insurance policies covering theft, robbery, larceny and burglary must be interpreted in a fair and reasonable manner in order to properly cover risk in the manner intended by the parties purchasing these policies. We will now examine some of these specific terms and provisions.

Theft

The term �theft� is intended to be interpreted as broadly and as liberally as possible to protect the insured. Theft is defined to mean the taking of the property of another without authority. Theft includes any wrongful deprivation of property of another, including embezzlement or swindling. However, theft coverage under a homeowners policy is almost always limited to the property located on the insured premises. On the other hand, the policy may be expressly endorsed to include property which is away from the insured premises.

Theft coverage for a dwelling may often exclude coverage unless the insured is residing therein. Theft policies frequently contain clauses excepting liability under other circumstances as well. For example, coverage for the loss of goods due to the dishonesty of employees of the insured generally is exempted from coverage and the insurer is relieved of liability for such acts.

Robbery

�Robbery� is a greater crime than theft. It is the unlawful taking of property, of any value, by means of force or violence or by putting a person in fear.

Robbery policies frequently insure against loss by theft or larceny as well and may also cover losses from false pretenses. Robbery policies frequently contain provisions requiring the insured to take certain specified precautions to avoid or discourage the commission of robberies.

Such conditions are particularly common in bank robbery policies. Prominent among such provisions are those extending coverage to robbery from safes or vaults while they are locked or if a certain number of custodians, employees or guards are present.

Larceny

�Larceny� is the wrongful or fraudulent taking and carrying away by any person of the personal property of another, from any place, with a fraudulent intent to deprive the owner of his property.

Burglary

�Burglary� at common law is the breaking and entering of the dwelling house of another, with the intent to commit felony therein. Burglary policies cover loss and damage to property occasioned by burglary or attempted burglary.

There are provisions which are designed to either extend or to limit the coverage under policies covering burglary. These provisions may include the following: 

�       The policies may expressly restrict coverage to particular times or places, such as times when the property is in the actual care or custody of the insured, in transit, in a specified building, in a safe or vault, or in the mail.

�       A burglary policy may require that the insured exercise due diligence in maintaining an alarm system. Failure to keep the insured property within a designated area or place for safekeeping also may preclude recovery.

�       Burglary policies commonly extend to losses sustained by the insured, members of the insured�s family and members of the insured�s household. Some insurance policies may restrict the benefit of the coverage to permanent members of the insured�s household.

�       In some burglary policies, exception is made for loss caused by riots or civil commotions.

�       Burglary policies often contain provisions restricting the insurance company�s liability to cases where there are some �visible marks� or �visible evidence� of the use of force or violence affecting a felonious entry. These provisions are inserted for the protection of the insurer to help avoid false claims.

�       Policies covering burglary from safes also commonly require visible marks upon the insured�s safe for payment of a claim. In some instances, the requirement of visible marks or visible evidence has also been imposed in policies pertaining to the theft of property from an insured�s automobile. In order to satisfy the policy requirement, the determination of what constitutes visible marks or visible evidence, and where the marks or evidence must be located is largely dependent upon the particular facts at hand. For example, a burglary policy requires that there must be visible marks of force or violence �at the place of entry� onto the premises. This requirement has been held to have been complied with if the visible marks are on one of the outer doors of the insured�s premises. However, if the only visible marks are those on the inside doors, recovery has been denied. The term, �visible marks at the place of entry,� means that there must be marks from which it can be properly inferred that there exists intent to commit a felonious act.

�       Some insurers have added a force or violence provision to their policies. This provision adds a further requirement that the forcible entry must be evidenced by �physical damage to the premises.�  A burglary policy may require an entry with force and violence greater than that employed in any breaking in order �to effect entry.�  The fact that a thief obtains property through intimidation satisfies the criminal law requirement of a taking by force.

�       Many policies specifically exclude loss of property by �mysterious disappearance.� Such a position would relieve the insurer of liability where the property was misplaced or lost by the insured and not the result of the felonious act of another.

�       Generally, there are provisions requiring the insured to deliver any recovered or damaged property to the insurer. If the insurer has paid the insured the indemnity provided in the policy, and the property later is recovered, the insurer may be entitled to possession of the recovered property.

�       Coverage specifically exists if the insured is forced at gunpoint to cash checks or withdraw money for payment to a thief.

�       A policy may cover the theft of �securities� and may define what is meant by that term. Blank checks, �all negotiable or nonnegotiable instruments, or contracts representing either money or property� are considered securities.

�       The word �merchandise� is used in policies insuring proprietors against interior robbery of �money, merchandise and securities.� Merchandise is defined as being customarily sold within the proprietorship. In addition, these policies indemnify the insured for all damages, within the policy limits, for loss of money by robbery from messengers, loss of money when a custodian is kidnapped, loss of money by safe burglary (provided the safe doors are locked), and loss of money by burglary from within any night depository in a bank.

Safes

Bank robbery policies commonly provide that coverage is only extended to robbery from safes or vaults while they are locked. Similarly, a commercial burglary insurance policy may limit coverage to property within a safe, vault or other designated container or place of security.

A policy of burglary insurance covering the burglary of the contents of a safe while it is duly closed and locked does not cover a loss where only a compartment was feloniously broken into while the outer door of the safe was unlocked and open.

The loss of money from an open safe is not covered by a burglary insurance policy covering loss from a locked safe opened by force or forcible entry. However, the taking of money by robbers from a safe which has been unlocked in preparation for the transferring of money is an insured risk.

Disappearance Coverage

Early burglary and theft insurance policies occasionally contained provisions which stated that the disappearance of an insured object would not be considered as evidence of a theft or burglary. The insurance companies varied widely in their requirements for proof of theft.

Generally, these provisions were interpreted in favor of the insured, allowing the proof of loss by the use of circumstantial evidence. A mysterious disappearance of an object was an event from which theft might be deduced. Courts readily accepted that the proof of the disappearance of insured property under mysterious circumstances was adequate to support recovery under a policy in which the insurer agreed to pay for the loss by theft.

In order to bring about a greater uniformity in adjusting practice and also to eliminate a source of policyholder dissatisfaction, the �mysterious disappearance� contingency clause was later introduced into the standard form theft policy.

Today many policies actually include the term �mysterious disappearance� within the definition of theft. Others simply provide affirmative coverage for loss by theft, attempted theft or by mysterious disappearance. The general rule is that the proof of mysterious disappearance alone suffices to enable the insured to recover, even without showing the probability of theft.

Mysterious disappearance embraces any disappearance or loss under any unknown, puzzling or baffling circumstances. Recovery is typically allowed when the article disappears from the place the insured left it. Generally, proof of the disappearance alone establishes the insured�s right to recover without showing a probability of theft

Recovery is ordinarily disallowed where the insured has no recollection of when he or she last had possession of the article. Policies may allow for a presumption of theft; however, it is still necessary for a loss to be established. Thus, the words �mysterious disappearance� do not transform the policy into an �all loss� policy, or one which covers lost or mislaid articles.

Extortion

Extortion is defined as the act or practice of obtaining money from a person by force or by illegal power. Extortion is a type of criminal activity which falls within general theft insurance coverage, even where the policy does not specifically mention extortion. Consequently, insurers find it worthwhile to draft theft insurance policies to expressly exclude coverage of extortion payments or to attempt to obtain increases in insurance premiums for the coverage of extortion payments.

Generally, in cases involving kidnapping and the taking of hostages in a plane hijacking, the insured may recover against the insurer under a theft policy for ransom paid in response to such extortion activities. There is no obstacle to the insured�s recovery where the policy states that the losses must occur while the property is on the premises of the insured. As long as the policy covers the sort of risk posed by threats of extortion, the insured cannot be denied coverage on the grounds that the ransom payoff occurred off the premises of the insured.

Forgery

�Forgery,� under an insurance policy, is roughly equivalent to an act which the criminal law would consider to be a crime of forgery. This crime is defined as the act of falsely or fraudulently making or altering a document. However, some policies contain their own definitions of that term. In these cases, the policy definition prevails over the criminal law definition.

Recovery is allowed under the policy where the evidence establishes a loss occasioned by forgery. Recovery is denied where the loss does not involve a forgery, such as where the false instruments actually are executed by the parties purporting to have made them. Like other forms of insurance contracts, any ambiguities are resolved in favor of the insured.

There is a fund given appropriations from the United States Treasury that makes money available to the Treasurer of the United States for making settlement with the payees of certain checks drawn on the Treasury of the United States which have been lost or stolen, and negotiated and paid by the treasurer on forged endorsements.

To receive a replacement check, the claimant must show that:

�       The check was stolen or lost without fault on the part of the claimant.

�       The check was thereafter negotiated and paid on a forged endorsement of the claimant�s.

�       The claimant did not participate either directly or indirectly in the proceeds of such negotiations.

�       Reclamation from the forger subsequent to the forgery has been or may be unsuccessful.

Dishonesty and Fraud Insurance

Insurance against fraud is often found in the coverage of fidelity insurance, or a fidelity bond. The party issuing the bond is called the �insurer� or �surety,� and these terms are often used synonymously. This type of insurance covers losses caused by �fraud or dishonesty� to an employer through acts of an employee. The bond covering these losses is ordinarily held to extend beyond acts which are criminal.

The terms �fraud� and �dishonesty� are generally words which are given a broad meaning, and they are always construed most strongly against the insurer. These terms include any act showing a want of integrity or breach of trust, or an abstraction of funds, together with deceit or concealment. �Abstraction of funds� and �wrongful abstraction� are terms defined as the unauthorized and illegal taking or withdrawing of funds or property from the possession and control of the employer, and the appropriation of such funds or property to the benefit of the taker, or to the benefit of another, without the employer�s knowledge and consent.

�Willful misapplication� means a willful, unauthorized, and illegal application of funds or property of the employer to the use and benefit of the bonded employee, or to the use and benefit of another with the employee�s knowledge and consent with intent to injure or defraud the employer. �Funds� do not necessarily mean actual cash. Funds is a much more comprehensive term and may include other assets or property.

Mere negligence, a mistake or an error in judgment does not constitute fraud or dishonesty. However, by their express terms, some fidelity bonds cover losses resulting from the negligence of the bonded person. A fraudulent or dishonest act is often defined as one of �wrongful purpose and connotes immoral inclination.�

To constitute fraud or dishonesty, it is not necessary that the bonded person intend to benefit personally from his wrongful act or conduct. The breach of trust can be performed for the profit of, or in connection with, another person.

A breach of the bond occurs when an employee fails to account for money which he is engaged in collecting and receiving for his employer, or where he fraudulently misappropriates, or assists in misappropriating, funds or property belonging to his employer. On the other hand, there is no breach of the terms of the bond if an employee becomes indebted to his employer through a mistake or carelessness with no intent to defraud, even though his act results in a loss to his employer.

The following section characterizes the more detailed aspects of fidelity bonds.

Fidelity Bonds

A fidelity bond, or fidelity insurance, is a contract whereby, for a consideration, one agrees to indemnify another against a loss arising from the want of honesty, integrity or fidelity of an employee or other person holding a position of trust. While the contract may resemble suretyship, it is generally held that guaranteeing the fidelity of employees or other persons holding positions of trust is, in effect, a form of insurance. Such a contract is subject to the rules applicable to insurance contracts generally.

The party that insures the fidelity of another is called the �insurer� or �surety.� For any party that insures the fidelity of an employee, that party�s liability is primary and direct.

A fidelity bond must be issued for a lawful purpose; a contract guaranteeing the fidelity of one�s employees in an illegal pursuit is unenforceable. A fidelity bond issued to a foreign corporation which has no right to do business in a state is, likewise, invalid.

Fidelity bonds take the nature of insurance contracts and are generally subject to the same rules of construction applicable to insurance policies. For example, ambiguities shall favor the insured. The parties to a fidelity bond or policy have the right to write their own contract under whatever terms they require. Further, a fidelity bond is not binding on the insurer when not signed by the employee.

A surety on a fidelity bond is liable for losses only when they are caused by the derelictions occurring within the period of time covered by the bond. The bond may validly limit the liability of the surety to losses occurring within a specified term or period of time. This practice thereby excludes liability for acts occurring prior to the effective date of the bond and acts occurring after the expiration of the bond.

Often fidelity bonds are issued to insure the integrity and honesty of officers and employees who are reelected or reappointed to their offices or employments. Where the officer or employee holds a continuous office subject to the pleasure of his superiors, it is held that the continuity of the office has not changed by an annual reappointment, so the party is covered by the bond during the entire time that the party holds the office.

A different rule is applied where the contract of the parties evidences that the fidelity bond is limited to a particular term or time during which the bonded person holds the covered position. The period covered by a fidelity bond and the renewals thereof depends upon the intention of the parties ascertained from the terms. The renewal of a fidelity bond constitutes a separate and distinct contract for the period of time covered.

Some fidelity bonds contain provisions specifying the grounds for the termination of the bond. A clause may authorize the surety or the employer to terminate the bond by giving the other party a notice within a specified advance time. A clause may provide that the bond shall terminate upon the discovery by the employer of any act of infidelity or default on the part of the employee. However, even the strongest suspicion does not amount to knowledge or discovery of dishonesty and nothing short of the discovery of dishonesty, fraud or the positive breach of the imperative conditions will terminate the bond.

A fidelity bond insuring an employer against the dishonesty and/or fraud of a particular employee terminates upon the death of the employer, even though the employer�s business is continued by his executors.

In order to hold a surety or insurer liable under a fidelity bond, the loss insured against must be caused by the person whose fidelity is insured and while that person is acting in the particular capacity or position for which his or her fidelity is insured.

Fidelity bonds frequently insure an employer against losses caused by the wrongful acts or conduct of �employees.�  The existence of an employer-employee relationship has been sustained where the insured has control over the activities of the alleged employee. If a person performs the duties of an employee, that person is held to be an employee within the terms of a fidelity bond regardless of whether that person is called an employee, agent, broker, salesman, etc. Whether the parties have properly used the generic term �employee� is immaterial.

Ordinarily, the term �employees� applies only to those persons who are regularly and permanently employed by the insured employer. It does not cover an employee of another company, for example, who at its direction merely reported to the insured temporarily for work, and then reported back to his or her own employer.

Generally, where a person occupies a dual position as employee of two or more entities, it is necessary to determine in which capacity he acted when he caused the loss by his misconduct or infidelity. If the loss occurs through acts performed under both employments, the sureties on the fidelity bonds to the different employers are jointly liable.

A corporate director is not an employee under a fidelity bond defining the term �employees� as �officers, clerks and other persons in the insured�s direct employ.� However, the director is not necessarily excluded from the class of �employees� and can be covered by special wording of the policy.

In order for a surety or insurer to be liable under a fidelity bond, the loss suffered by the insured employer must have been caused by acts or defaults contemplated by the bond. The particular type of misconduct covered by the fidelity bond must be expressly specified, and the bond does not provide coverage for other kinds of misconduct that are not specified.

Ordinarily, a fidelity bond does not cover acts or defaults committed outside the scope of employment. Also, there is no coverage where an employee causes the employer loss in connection with a business other than the one which is designated in the fidelity bond. However, the fact that the wrongful act was committed by the employee after working hours does not preclude coverage for the resulting loss.

Some fidelity bonds limit their coverage to acts or defaults committed at a particular place or location. However, the fact that an employee works at a place other than that described in the terms of the bond does not preclude recovery where the contract permits �interchanges or substitutions among any of the employees.�

Often fidelity bonds are conditioned upon a faithful discharge of duties covering losses resulting from negligence of the bonded employee. Even though a fidelity bond does not use the term �negligence,� but does insure the faithful discharge of an employee�s duties, it is held that if the employee, knowing the risk involved, fails to use such diligence in protecting the property entrusted to his care as should be used by an ordinarily prudent person, the surety may be held liable from the resulting loss. However, fidelity bonds conditioned upon a faithful discharge of duties do not provide coverage where the loss results from the incompetence of the employee.

Fidelity bonds cover losses caused by purposeful acts or conduct on the part of the bonded person amounting to fraud, dishonesty, larceny, embezzlement, wrongful abstraction, misappropriation and the like. However, there is no recovery for these or similar acts when there is only a mistake, carelessness, or error of judgment on the part of the bonded person.

The general principles of concealment, representations and warranties which apply to insurance contracts generally are applicable to fidelity bonds. For example, it would be fraudulent for an employer, without making full disclosure, to apply for and accept a fidelity bond upon an employee whom he knows or believes to be untrustworthy or guilty of conduct which makes him unfit for a position of trust. Further, as a general rule, a surety or insurer on a fidelity bond is released from liability where the employer, in obtaining the bond, knowingly misstated facts or deliberately concealed them.

A fidelity bond may validly impose upon the insured employer the requirement of taking steps to bring about the prosecution and conviction of the defaulting employee and may make performance of such obligation a condition to recovery. Such a provision, however, requires only that the employer make reasonable efforts to bring about the prosecution and conviction of the defaulting employee. If he has made such reasonable efforts he is entitled to recover on the bond, although no indictment is actually returned against the employee.

An insured employer under a fidelity bond cannot recover from the surety if he releases the defaulting employee from liability. For example, if upon discovery of default, the employer and employee, without the consent of the surety, enter into a new contract having resolved their differences, the surety is released from liability.

Even in the absence of an express provision in the fidelity bond, an employer who retains in his employment an employee who has been guilty of conduct that breaches the bond and conceals this fact from the surety cannot hold the surety liable for subsequent defaults of the employee.

Unless specifically stated otherwise within the terms of the bond, a material change in the nature of the duties of the person whose fidelity is guaranteed acts to release the surety from liability for acts committed after the change in the person�s duties. However, this is distinguished from the mere addition of further duties to the person�s usual tasks. If a crime is committed after the termination of a bonded person�s employment, the surety is not liable, even if the conspiracy was formulated during his or her employment.

Unless otherwise stated under the terms of the fidelity bond, the employer is required to provide notice of loss when he has actual knowledge of the loss or dishonest act. This is distinguished from the time the employer may merely suspect wrongdoing. The employer is required to be diligent in making discovery or obtaining knowledge regarding suspected wrongdoing. The liability of the surety is generally reduced in the event the insured employer recovers any part of the loss.

Rules of Bailment

A �bailment� is defined as the delivery of personal property by one person to another for a specific purpose with a contract, expressed or implied, that this trust shall be faithfully executed. The property is returned or duly accounted for by the bailee when the special purpose of the bailment is answered or is kept until the bailor reclaims it.

The word �bailment� is derived from the French �bailer,� meaning �to deliver.�  �Bailee� is the term applied to the person who receives possession or custody of the property, thereby constituting bailment. �Bailor� is the term given to the person from whom the property is received.

The only property that can be the subject of a bailment is personal property, including money and personal belongings.

Some examples of particular classifications for transactions to which the law of bailments applies follow:

�       �Depositum� is a deposit of goods to be kept for the bailor by a person usually called a depositary. Custody, as opposed to service, is the chief purpose here. The depositary only holds the goods for safekeeping without any personal benefit.

�       �Mandatum� is a delivery of goods to someone who is to carry or do something to them, without compensation.

�       �Commodatum� is a lending or hiring of personal property to another with the property to be used by the bailee for his own pleasure or in his own business.

�       �Pignori acceptum� or �vadium� is the pawn or delivery of goods as security for a debt, where the title actually passes until the bailor reclaims it.

�       �Locatum� is the delivery of goods, always with reward, such as the bailee who gains temporary use of the goods.

The Consumer Leasing Act regulates contracts in the form of leases or bailments for the use of personal property for periods exceeding four months. Here a consumer lease is defined as a contract in the form of bailment for a period exceeding four months and not exceeding $25,000, primarily for personal, family or household purposes. Bailments for agricultural, business, commercial or governmental purposes are specifically excluded.

Each lessor is required to give the lessee, before consummation of the lease, a dated written statement with all pertinent information concerning the terms, including such things as the identification of the property, amount of money to be paid or to become payable, express warranties and guaranties, insurance requirements, security interests, and liabilities on the expiration of such. Penalties or other charges for delinquency, default or early termination may be specified in the lease.

Redlining

Case law has defined �redlining� as discrimination based on the characteristics of the neighborhood surrounding the dwelling. It is the denial of home mortgage loans or insurance coverage in these areas based on geography rather than risk. Redlining evolved when financial institutions and insurance companies literally drew red lines around entire neighborhoods, usually poor and minority communities, deemed off-limits for loans and homeowners insurance. Redlining is now illegal.

Crime is often higher in urban areas, making them riskier to insure. Insurance carriers often cite loss costs being demonstrably higher for these areas, accounting for more stringent underwriting rules and higher premiums.

Over the years, civil rights groups have filed complaints accusing major insurance carriers of redlining, stating that the concept of �risk� is often used as an excuse for prejudice. Lobbyists for the poor have long claimed that this practice denies their clients fair access to the financial system.

One solution to the problem of redlining was introduced  when the Federal Crime Insurance Program was established by Congress in 1970 and began operation in August 1971. The Federal Crime Insurance program is a national insurance program administered by the Federal Insurance Administrator. The program�s purpose is to make available crime insurance policies in high crime areas where an availability problem exists. These policies provide coverage for individual and business losses due to burglary and robbery and are made available when private insurance is not.

Preventive Measures

Most insurance companies offer reductions in premiums to those who take preventative measures in keeping their homes, businesses, automobiles and personal property secure. Keeping property secure causes a likeliness of avoidance of crime. It is well documented that education and preventative efforts can contribute toward substantial decreases in crime.

To commit a crime, a criminal needs two things: an opportunity and a victim. Some efforts for which insurance companies reward prevention with decreased premiums are keeping the home secure with deadbolt locks, window locking devices, special outdoor lighting and monitored alarms. Automobile theft can be discouraged with the use of car alarms or supplemental security devices. Insurance companies often offer premium reductions for these devices. With regard to businesses or commercial properties, efforts such as security gates, deadbolt locks, and guards or guard services are often given premium reductions.

Neighborhood watch programs have proven to be effective crime deterrents. They offer a constructive way to channel anger over crime. Police departments and citizens� organizations suggest that promoting social interaction and fighting isolation may be the most effective weapon against crime.

Conclusion

Some producers may be reluctant to discuss crime with customers because it may seem like they are trying to scare people into purchasing insurance products. Although insurance producers should not unduly frighten prospects, it is important that the industry make customers aware of the dangers of crime that exist and the coverage available to protect against losses from these dangers.

Which of the following could be considered a custodian under the terms of a commercial crime policy?

Which of the following would be covered under a commercial crime policy?

Which of the following individuals is not considered a custodian in commercial crime insurance?

Which of the following has the care and custody of the insured's property outside the premises?