When companies take into consideration defending themselves from danger, they usually deal with property harm, pure disasters, or buyer lawsuits. Nonetheless, one of the crucial damaging and infrequently missed threats comes from inside: worker theft. Irrespective of the dimensions of your online business, a dishonest worker may cause huge monetary hurt—and plenty of enterprise homeowners discover out too late that their insurance coverage could not cowl all of the losses. A current federal courtroom determination out of Kansas helps clarify why understanding the bounds of your worker dishonesty protection is so necessary. 1
The case concerned the Kansas Masonic Basis (KMF), a nonprofit group that skilled a staggering loss over a number of years. In 2022, KMF found that its accounting supervisor, Sylvia Obaya, had been writing and cashing unauthorized checks made out to herself. Obaya additionally altered the corporate’s bookkeeping to cover the theft. The fraud went undetected for years, from way back to August 2015 till it was lastly found in September 2022. By then, she had taken greater than $550,000. KMF instantly reported the theft, terminated the worker, and commenced the tough means of recovering its losses.
KMF did what many companies do to guard themselves. It maintained steady insurance coverage protection that included crime and worker dishonesty protection. From 2013 to 2020, KMF was insured by means of Cincinnati Insurance coverage and New Hampshire Insurance coverage. Then, beginning in July 2020, KMF switched to Auto-Homeowners Insurance coverage Firm and stored protection by means of 2023.
After discovering the theft, KMF filed a declare with Auto-Homeowners. The insurer paid out about $137,000, which lined losses that occurred after July 1, 2020—the beginning of Auto-Homeowners’ first coverage. Nonetheless, when KMF tried to get well an extra $410,000 for losses that occurred earlier than 2020, Auto-Homeowners denied the declare. KMF argued that their present coverage ought to present protection for earlier losses underneath one thing known as a “prior loss provision,” which might prolong protection if a brand new coverage instantly follows a previous one. Since KMF had maintained steady protection and had not found the theft till 2022, they believed they need to be lined underneath the phrases of their coverage.
Auto-Homeowners, nevertheless, disagreed. The insurance coverage firm argued that the prior loss provision solely utilized to losses that occurred throughout the instantly previous coverage interval—that’s, the one proper earlier than the present coverage. On this case, that will have been Auto-Homeowners’ personal 2021–2022 coverage. As a result of the thefts KMF was claiming occurred years earlier than that, throughout the New Hampshire and Cincinnati coverage durations, Auto-Homeowners mentioned these losses fell exterior the protection limits. They defined that the coverage had a one-year discovery window, and the prior loss provision couldn’t be used to achieve again endlessly into older insurance policies from totally different insurers.
The courtroom agreed with Auto-Homeowners. In its ruling, the courtroom mentioned the language of the coverage was clear: For a loss underneath a previous coverage to be lined, that prior coverage needed to finish when the brand new one started. In different phrases, the present coverage may solely cowl losses from the instantly prior coverage, not a number of layers of prior insurance coverage. The courtroom rejected the concept that protection ought to be stacked throughout all previous insurance policies, saying that will ignore the plain wording of the contract. The choose additionally identified that Auto-Homeowners had already used the prior loss provision to cowl losses from 2020 to 2022—one thing it wouldn’t have completed if that provision had no that means.
A part of the policyholder’s argument was legitimate—“any prior insurance coverage” appears broad. The courtroom’s order might be criticized for locating that the time period “clearly” referred to only the prior coverage for the reason that coverage language didn’t say “the prior insurance coverage coverage.”
Researching business supplies on this difficulty, IRMI doesn’t say that protection extends again indefinitely. Its dialogue about worker theft extension for earlier protection states:
Extension for Earlier Protection
Protection additionally applies to loss that will have been lined underneath a previous coverage besides that the invention interval had expired, offered that sure standards are met. That is established within the “extension for earlier protection” provision of the crime normal circumstances protection half kind (CR 0100).
With out such a provision, a loss from acts that occurred throughout a earlier coverage interval however weren’t found till after that coverage’s discovery interval had terminated could be uninsured. The insurer that issued the earlier coverage wouldn’t be obligated to pay since its coverage’s discovery interval had terminated, and the current insurer wouldn’t be obligated to pay as a result of the acts inflicting the loss didn’t happen throughout its coverage interval.
For protection to use to acts dedicated throughout a previous coverage interval, each the present and the prior coverage should present protection for these acts. Additionally, the present coverage should take impact on the time of the termination of the earlier coverage. Due to this fact, it can be crucial that the termination date and hour of the prior coverage precisely match the inception date and hour of the substitute coverage.
The restrict relevant to this protection extension is the lesser of the restrict relevant underneath the prior coverage or the restrict relevant underneath the present coverage—until the insurer for the present coverage additionally issued the prior coverage. In that case, one other provision within the crime normal provisions kind (the “loss underneath earlier protection offered by us” provision) establishes that the quantity payable is the larger of the restrict relevant underneath the prior coverage or the restrict relevant underneath the present coverage.
I’d be curious from brokers or danger managers if protection is out there for a truth sample on this case. Some worker theft actions go undetected for years.
What can companies study from this case?
First, worker dishonesty is a really actual menace. It doesn’t simply occur in huge firms. Small and midsize companies will be particularly susceptible as a result of they usually lack robust inner controls and will place a variety of belief in a number of key workers. Second, this type of fraud is commonly onerous to detect, and by the point it’s found, years could have passed by. That’s why insurance coverage protection for worker theft, pc fraud, and different types of business crime is so necessary.
However simply shopping for protection isn’t sufficient. Enterprise homeowners want to know what their insurance policies really cowl and what they don’t. As this case exhibits, insurance policies have strict cut-off dates for when losses have to be found and the way far again protection can prolong. Switching insurers can even complicate issues, particularly if losses occurred underneath older insurance policies that now not apply.
Each enterprise, regardless of the dimensions or business, ought to have a dialog with a educated insurance coverage agent about crime protection. Ask about worker dishonesty insurance coverage, pc fraud safety, and what occurs if a loss is found years after it happens. These are usually not nice subjects, however they’re mandatory. A single dishonest act can undo years of onerous work. Insurance coverage ought to be there that can assist you get well when you’ve got the appropriate safety in place.
Thought For The Day
“Belief, however confirm.”
— Ronald Reagan
1 Kansas Masonic Basis v. Auto-Homeowners Ins. Co., No. 5:24-cv-04029 (D. Kan. Apr. 14, 2025).
