When companies take into consideration defending themselves from threat, they typically concentrate on property harm, pure disasters, or buyer lawsuits. Nonetheless, probably the most damaging and infrequently ignored threats comes from inside: worker theft. Irrespective of the dimensions of your enterprise, a dishonest worker may cause large monetary hurt—and plenty of enterprise homeowners discover out too late that their insurance coverage might not cowl all of the losses. A latest federal courtroom determination out of Kansas helps clarify why understanding the boundaries of your worker dishonesty protection is so essential. 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 strategy 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 via Cincinnati Insurance coverage and New Hampshire Insurance coverage. Then, beginning in July 2020, KMF switched to Auto-House owners Insurance coverage Firm and saved protection via 2023.
After discovering the theft, KMF filed a declare with Auto-House owners. The insurer paid out about $137,000, which lined losses that occurred after July 1, 2020—the beginning of Auto-House owners’ first coverage. Nonetheless, when KMF tried to recuperate an extra $410,000 for losses that occurred earlier than 2020, Auto-House owners denied the declare. KMF argued that their present coverage ought to present protection for earlier losses beneath one thing referred to as a “prior loss provision,” which may 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 beneath the phrases of their coverage.
Auto-House owners, nonetheless, disagreed. The insurance coverage firm argued that the prior loss provision solely utilized to losses that occurred through the instantly previous coverage interval—that’s, the one proper earlier than the present coverage. On this case, that may have been Auto-House owners’ personal 2021–2022 coverage. As a result of the thefts KMF was claiming occurred years earlier than that, through the New Hampshire and Cincinnati coverage durations, Auto-House owners 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 courtroom agreed with Auto-House owners. In its ruling, the courtroom mentioned the language of the coverage was clear: For a loss beneath 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 protection ought to be stacked throughout all previous insurance policies, saying that may ignore the plain wording of the contract. The choose additionally identified that Auto-House owners had already used the prior loss provision to cowl losses from 2020 to 2022—one thing it wouldn’t have executed if that provision had no which means.
A part of the policyholder’s argument was legitimate—“any prior insurance coverage” appears broad. The courtroom’s order could possibly be criticized for locating that the time period “clearly” referred to simply the prior coverage because the coverage language didn’t say “the prior insurance coverage coverage.”
Researching business supplies on this concern, 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 may have been lined beneath a previous coverage besides that the invention interval had expired, supplied 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 is vital 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 beneath the prior coverage or the restrict relevant beneath the present coverage—except 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 beneath earlier protection supplied by us” provision) establishes that the quantity payable is the larger of the restrict relevant beneath the prior coverage or the restrict relevant beneath the present coverage.
I might be curious from brokers or threat managers if protection is on the market for a reality 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 risk. It doesn’t simply occur in massive firms. Small and midsize companies may be particularly weak as a result of they typically lack robust inside controls and will place a variety of belief in just a few key staff. Second, this type of fraud is usually laborious to detect, and by the point it’s found, years might have passed by. That’s why insurance coverage protection for worker theft, laptop fraud, and different types of business crime is so essential.
However simply shopping for protection isn’t sufficient. Enterprise homeowners want to grasp 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 should be found and the way far again protection can prolong. Switching insurers may complicate issues, particularly if losses occurred beneath older insurance policies that not apply.
Each enterprise, irrespective 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, laptop fraud safety, and what occurs if a loss is found years after it happens. These will not be nice matters, however they’re essential. A single dishonest act can undo years of laborious work. Insurance coverage ought to be there that can assist you recuperate in case you have the appropriate safety in place.
Thought For The Day
“Belief, however confirm.”
— Ronald Reagan
1 Kansas Masonic Basis v. Auto-House owners Ins. Co., No. 5:24-cv-04029 (D. Kan. Apr. 14, 2025).