An insured suffers a six-figure theft claim at the hands of its employee executive director, who uses a corporate credit card for gambling and personal items. The insured has crime coverage under the ISO CR 00 20 policy, but the carrier denies the claim on the basis that the employee used a credit card. The denial letter reads:

"We have reviewed coverage under the Employee Theft Coverage and conclude there is no coverage for this loss because theft of covered property did not take place. Employee Theft is covered for loss or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee.’ While we have confirmed that [the executive director] was an employee at the time of the loss and it is believed that he made unauthorized financial transactions on the company credit card for personal use, unauthorized use of the company credit card would not be considered as theft of money, securities or other property as defined in the policy language. 

Employee Theft is covered for loss or damages to ‘money.’ The employee did not directly steal or take the company's currency, coins or bank notes in current use and having a face value…These unauthorized charges and uses would not be considered negotiable or nonnegotiable instruments."

Q: Is the insurer right to deny this claim?

Response 1: The insurer is wrong. The policy form reads:

“1. Employee Theft

We will pay for loss of or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee,’ whether identified or not, acting alone or in collusion with other persons.”

The insured will have to pay the credit card bill, thus it will suffer a loss. The insurer should pay the claim.

Response 2: The carrier is wrong. The form definition of "theft" is "any act of stealing." The insured experienced a direct loss of more than $100,000. There is no loss to the credit card—the credit card was just a means to steal money. The money came from the bank account. It makes no difference whether the person wrote personal checks to himself, a gambling facility, other businesses for personal expenses, or a credit card company that made payments for personal expenses. Regardless, there is a direct loss of "money" as a result of employee theft. 

Further, the policy states the loss must directly result from an "occurrence," as per the definition. There was an occurrence. The policy also states the loss must result directly from "theft," which is defined as the unlawful taking of property to the deprivation of the insured. Is there any other reason they lost more than $100,000?

This is not an indirect loss as per exclusion D.1.f.—which means that by default, it’s a direct loss. Plus, if this loss isn't covered under the basic crime policy, I don't see any way to cover it. There’s a reason there is no endorsement you can add to cover employee theft by credit card. And if it were unclear, ISO would have an endorsement to clearly exclude.

Finally, there are no exclusions in the form for this loss. Here are the exclusions in the form:

“D. Exclusions

1. This insurance does not cover: a. Acts Committed By You, Your Partners Or Your Members Loss resulting from ‘theft’ or any other dishonest act committed by: b. Acts Committed By Your Employees Learned Of By You Prior To The Policy Period c. Acts Committed By Your Employees, Managers, Directors, Trustees Or Representatives d. Confidential Or Personal Information e. Data Security Breach f. Governmental Action g. Indirect Loss Loss that is an indirect result of an ‘occurrence’ covered by this insurance including, but not limited to, loss resulting from: h. Legal Fees, Costs And Expenses i. Nuclear Hazard j. Pollution k. War And Military Action
2. Insuring Agreement A.1. does not cover: a. Inventory Shortages b. Trading c. Warehouse Receipts”

Response 3: I think this is clearly theft of money. The definition of “money” includes deposits to the named insured’s financial institution. The insurer should explain how unauthorized financial transactions via a credit card is not considered theft of money. The insurer seems to suggest the employer doesn’t have to pay the debts incurred from its financial institution. This is analogous to saying that using a check is not direct theft because the employer is not required to honor the check.

Response 4: It’s unclear from the description exactly how the transaction worked. The loss involved unauthorized use of a credit card, so I assume these transactions appeared on a monthly credit card bill, which the employer would subsequently approve and pay. On the other hand, it’s possible that the charges appeared and were disputed, but the credit card issuer refused to take them off the bill.

Either way, though, the insurer should pay for this loss. Suppose an employee used their employer's card to fly to New York and charged their plane fare, a luxury hotel, expensive meals and theater tickets, all without the employer's approval or knowledge. That loss is clearly covered, and so is this one. 

As for the property covered, the definition of "money" includes funds on deposit in the employer's account. Qualification as "theft" is equally clear—the employee didn't take the money by mistake. He deliberately used his employer's credit to gamble. 

It's also interesting that credit card losses are excluded for coverage A.6 but not for A.1. If the insurance company wanted to exclude such losses, it should have included A.1. in that exclusion.

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