FOCUS ON CRIME

Crime insurance is often lumped in with D&O and other “agnostic” covers bought by companies (EPLI and PTL/Fiduciary being others – I will tackle these in future Newsletters!). So, there aren’t many crime specialists out there and those who are, tend to be at the “senior” end of the talent pool.

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Added to this, there has always been a mystique about the product itself – which to many looks old fashioned and doesn’t as obviously as it could do appear to tackle modern risks the clients need covering, which are primarily now electronic crime by third parties via the internet. Also, how does Crime fit alongside Cyber and Specie? If you are an insurance professional or buyer working with Crime insurance but don’t regard yourself as a specialist, read on.

 

I’m not going to plod through the product (I have a training module for that if anyone’s interested); here are the ten things that most helped me understand Crime insurance!

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1. What is the most vital component of Crime insurance?

 

Crime cover responds to discovery of a direct financial loss (DFL). This may or may not be defined, but essentially it means the losses of the Insured that are caused directly by the crime. In the case of theft this is obviously the loss of the property that was stolen. It doesn’t include consequential loss – for instance where the theft of that property causes the Insured to suffer a business interruption, lost income, or have a liability to a third party.

 

2. What types of Crime are covered?

 

Crime cover tends to be split between internal crime cover – crime involving employees – and external crime cover – crime caused solely by third parties.

 

3. What’s covered under internal crime? 

 

As long as there is some kind of criminal act involving an employee and a DFL the cover is engaged, subject to any exclusion.

 

4. What’s covered under external crime?

 

Coverage here is usually split into certain specific categories of crime: documentary crime (forgery, counterfeit, fraudulent alteration of documents), electronic crime (hacking, malware etc), social engineering (dishonestly impersonating a real person eg employee, customer or trading partner), and extortion (threatening to do something unless the Insured transfers funds or property).The cover is also often controlled by limiting the coverage for these crimes to loss of certain types of assets – typically money/funds, valuable property, and securities (ie financial instruments with inherent monetary value).

 

5. Why the split between internal and external crime?

 

Primarily because the internal crime cover is easier to underwrite – so is broad, with the routes to cover being straightforward. Internal criminals are also usually easier to catch – at some point they make a mistake or go on holiday, and their activities are uncovered. Also, stolen funds or assets may be easier to locate and recover.

 

The external fraud is harder to underwrite and seen as riskier – these days there are some pretty sophisticated criminals out there! Once the funds / assets have gone recovery prospects will likely be low or at best complex and expensive. So, insurers control this cover via the methods described in (4) above. In this way, the Insured has more hoops to jump through before the external crime cover is engaged.

 

6. Is there is distinction between physical and electronic crime?

 

In the internal crime cover, no. The external crime cover may often be split between electronic and physical crime, but these are just the methods by which the same crimes – typically theft of funds or property or gaining property by deception – are carried out. For this reason, they should provide the same cover although the conditions around them will differ.

 

7. Are there typical extensions?

 

Yes, like many FL products there are extensions, typically for certain specified indirect financial losses. The most obvious ones are additional costs – costs of establishing a covered loss, costs of repairing, reinstating, or replacing damaged property (whether physical or electronic), or litigation costs, so long as accompanied by a covered DFL.

 

8. What’s the difference between FI Crime and Commercial Crime policies?

 

FI Crime is sold to financial institutions, Commercial Crime is for any other type of institution. Whilst superficially the products look similar they are not the same. One important difference is that in banking, depositors’ funds are treated as being the property of the bank – so loss of it is a DFL of the bank – not a third-party loss. This is why in Commercial Crime policies loss of client funds is usually given by extension as it is not a DFL of the institution itself and therefore wouldn’t otherwise be covered.FI Crime policies also tend to have more extensions for things that are unique to the financial institutions’ industry.

 

9. Is there any cover for non-criminal events?

 

Perhaps surprisingly, often yes, particularly in FI Crime. However, anything that should be covered under another type of policy eg property or professional liability is usually excluded.

 

10. What is not covered by a Crime policy?

 

Generally, the Crime policy is not there for loss or theft of data, cryptocurrency (unless specifically agreed), assets that exist solely in digital format, trade secrets or confidential information, and data breach costs absent a covered crime. A DFL where the only evidence is a financial or inventory calculation will not be sufficient to trigger the policy although will be accepted as supporting evidence.

 

Also, there is usually no cover for kidnap, fraud concerning bills of lading and other cargo documents (seen as too easy to forge / counterfeit / fraudulently alter), loans and trading losses unless an employee benefitted directly (this is particularly important in FI Crime as it takes out rogue trader losses), and where the DFL was at least partly caused by infrastructure or human failure or war / terrorism. In London there will always be a war / terrorism exclusion.

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Finally on Crime… three things to pay attention to:

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• How the Crime policy interacts with cyber and specie products

 

Despite the electronic crime cover Crime is not a substitute for Cyber nor vice versa. They cover different things, but in the product extensions they may overlap to an extent.My advice to the Crime market is to be clear about your boundaries! Alternatively, there is a case for combining Crime and Cyber which might benefit clients.

 

Specie tends to cover loss and damage or mysterious disappearance, including theft, of valuable assets, so may overlap to an extent with Crime but again they are not the same. If both products are bought there should be a clear demarcation between them.

 

• How the Crime policy comes to an end when there is an event during the policy period

 

Anyone who read the April newsletter will remember I commented on this previously. Crime policies are not always as clear as they could be on what happens when the Policyholder is taken over, divests a subsidiary or goes bust. The policy should probably stop providing cover for DFLs occurring after the event in question (unless the Policyholder retains ongoing financial interests in any potential DFL), but provide a period after the event (not necessarily to the end of the policy period) for reporting discoveries of a DFL that occurred prior to the event.

 

• Claims – it’s all about claims right?

 

The policy is triggered by a “discovery” of a DFL during the policy period (usually by someone fairly senior – and obviously not someone actually involved in the crime!). When there is a claim under the policy, there may be a condition requiring a proof of loss (“PoL”) to be provided by the Insured within a certain period.This period will often be insufficient, particularly in complex frauds or where the police have locked down information. The parties should agree a longer period in such cases. The insurers won’t pay a loss until a PoL is provided but should be flexible in terms of time frames.

 

Crime is sometimes overlooked as a cover, particularly with the focus on cyber, but as a product it potentially has a lot to offer and may be an important part of an Insured’s protections. There are signs the market is embracing this and updating / upgrading the available products to make them more accessible and useful to buyers. This is a welcome step for everyone.