Adequacy of Employee Theft Coverage
The Employee Theft fidelity insuring agreement of the crime policy covers theft, defined
as “the intentional unlawful taking of Money,
Securities, and Other Property to the insured’s deprivation” (i.e., misuse and embezzlement), committed by a payee’s
employees. On its face, the plain language of this agreement appears adequate for purposes of
employee theft coverage. However, this is a convoluted policy that requires further consideration of relevant
definitions and conditions.
For example, the policy specifically defines Money, Securities, and Other Property in three distinct ways:
Money means a medium of exchange in current use and authorized or adopted by a domestic
or foreign government, including currency, coins, bank notes, bullion, travelers’
checks, registered checks and money orders held for sale to the public.
Securities means written negotiable and non-negotiable instruments or contracts representing
Money or property, such as tokens, tickets, revenue, and stamps – but does not include
Other Property means any tangible property other than Money and Securities that has intrinsic value.
Under these definitions, SSA beneficiary funds would fall within the term “money,”
but are excluded from the term “other property,” because funds are not physical property.
But there is a Conditions provision that limits the Employee Theft fidelity insuring
agreement, which complicates matters. Section V(A)(5)(a)—the provision upon which
the payee relies to support its interpretation of the policy—is entitled “Ownership
of Property; Interests Covered.” This section explicitly “limit[s]” the crime policy at issue to covering only “property:”
That the Insured owns or leases;
That the Insured holds for others:
On the Insured’s Premises or the Insured’s Financial Institution Premises, or
While in transit and in the care and custody of a Messenger; or
For which the Insured is legally liable (except for property located in the Insured’s
Client’s Premises or the Insured Client’s Financial Institution Premises).
However, the policy does not define “property,” and this is potentially problematic.
This ambiguity leaves open the possibility that a court interpreting the policy during
litigation could find that the crime policy (a) does not include money, or (b) refers
to “Other Property,” which, as discussed above, also does not include money. Consequently, there is some risk that a court could conclude that beneficiaries’
funds do not constitute property that falls within those contractual conditions.
Nevertheless, the more reasonable interpretation is that the term “property” encompasses
money. Furthermore, if this issue was litigated, we would cite the ambiguity with respect
to the undefined term “property” and argue that beneficiary funds are “property…for
which the Insured is legally liable.” Indeed, under the regulations, a payee who misuses a beneficiary’s benefits “is responsible
for paying back misused benefits.” The regulations also specifically reference a “representative payee’s liability”
in this context. Thus, even considering the potential issues with this convoluted policy, there is
likely adequate coverage in the case of misuse and embezzlement by employees of the
While the payee organizations cite the “holds for others” provision to argue there
is sufficient coverage, this argument does not hold water. Under Section V(A)(5)(a),
the crime policy covers, in relevant part, property that the Insured “holds for others”
either on the “Insured’s Premises” or in the “Insured’s Financial Institution Premises.” But the policy defines “Premises” as “the interior of that portion of any building
the Insured occupies in conducting the Insured’s business.” And the policy defines “Financial Institution Premises” as “the interior of that
portion of any building occupied by a Financial Institution,” including a night depository
chute or a safe deposit. Because beneficiary funds are highly unlikely to be kept in the payee’s place of
business or in a safety deposit box, this provision does not provide adequate coverage.
Nevertheless, given the “legally liable” language discussed above, the policy remains
Finally, we considered whether requesting the payee to obtain coverage under the “Employee
Theft of Client Property” fidelity insuring agreement of the crime policy would mitigate
any potential risk. We conclude that it would not. There are a variety of reasons why that coverage would
be unlikely to cover employee theft of beneficiary funds, including that the policy
definition of “Client” means “an entity”—not a natural person, such as a beneficiary.
In sum, though we cannot say that there is no risk in accepting this coverage, it
is likely adequate coverage in the case of misuse and embezzlement by a payee’s employees.