When companies take into consideration defending themselves from danger, they usually concentrate on property injury, pure disasters, or buyer lawsuits. Nevertheless, some of the damaging and infrequently neglected threats comes from inside: worker theft. Regardless of the dimensions of your corporation, a dishonest worker may cause large 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 court docket choice out of Kansas helps clarify why understanding the bounds of your worker dishonesty protection is so vital. 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 troublesome technique 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 Cincinnati Insurance coverage and New Hampshire Insurance coverage. Then, beginning in July 2020, KMF switched to Auto-Homeowners Insurance coverage Firm and saved protection by 2023.
After discovering the theft, KMF filed a declare with Auto-Homeowners. The insurer paid out about $137,000, which coated losses that occurred after July 1, 2020—the beginning of Auto-Homeowners’ first coverage. Nevertheless, when KMF tried to recuperate a further $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 below one thing known as a “prior loss provision,” which may lengthen 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 coated below the phrases of their coverage.
Auto-Homeowners, nonetheless, disagreed. The insurance coverage firm argued that the prior loss provision solely utilized to losses that occurred in the course of the instantly previous coverage interval—that’s, the one proper earlier than the present coverage. On this case, that might have been Auto-Homeowners’ personal 2021–2022 coverage. As a result of the thefts KMF was claiming occurred years earlier than that, in the course of the New Hampshire and Cincinnati coverage intervals, 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 completely different insurers.
The court docket agreed with Auto-Homeowners. In its ruling, the court docket mentioned the language of the coverage was clear: For a loss below a previous coverage to be coated, that prior coverage needed to finish when the brand new one started. In different phrases, the present coverage might solely cowl losses from the instantly prior coverage, not a number of layers of prior insurance coverage. The court docket rejected the concept that protection needs to be stacked throughout all previous insurance policies, saying that might 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 finished if that provision had no which means.
A part of the policyholder’s argument was legitimate—“any prior insurance coverage” appears broad. The court docket’s order may very well be criticized for locating that the time period “clearly” referred to only the prior coverage because the coverage language didn’t say “the prior insurance coverage coverage.”
Researching trade supplies on this situation, 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 might have been coated below 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 situations protection half type (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 can 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’s important 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 below the prior coverage or the restrict relevant below 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 type (the “loss below earlier protection offered by us” provision) establishes that the quantity payable is the better of the restrict relevant below the prior coverage or the restrict relevant below the present coverage.
I’d be curious from brokers or danger managers if protection is obtainable for a truth sample on this case. Some worker theft actions go undetected for years.
What can companies be taught from this case?
First, worker dishonesty is a really actual risk. It doesn’t simply occur in huge corporations. Small and midsize companies could be particularly susceptible as a result of they usually lack sturdy inside controls and will place plenty of belief in just a few key workers. Second, this sort of fraud is usually exhausting 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 industrial crime is so vital.
However simply shopping for protection isn’t sufficient. Enterprise homeowners want to know what their insurance policies truly cowl and what they don’t. As this case reveals, insurance policies have strict closing dates for when losses should be found and the way far again protection can lengthen. Switching insurers may also complicate issues, particularly if losses occurred below older insurance policies that now not apply.
Each enterprise, regardless of the dimensions or trade, 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 usually are not nice matters, however they’re obligatory. A single dishonest act can undo years of exhausting work. Insurance coverage needs to be there that will help you recuperate you probably have the best 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).
