Key takeaways:
Courts may have inconsistent standards for determining whether losses result “directly” from employee dishonesty, making crime insurance coverage outcomes difficult to predict.
Modern crime claims can require careful investigation to distinguish covered losses from broader financial consequences.
Policyholders should clearly connect dishonest conduct to claimed losses while preserving all avenues for coverage.
Commercial crime insurance claims can become complicated when a loss extends beyond money or property an employee steals. Courts have reached different conclusions about what it means for a loss to result “directly” from dishonest conduct, making causation critical to coverage analysis and claim preparation.
What makes a loss “direct”?
Disputes over what constitutes a “loss resulting directly from” employee dishonesty remain among the most heavily litigated issues in commercial crime insurance coverage. Despite the frequency of these disputes, “direct” is rarely defined in policy language. That leaves courts to interpret the term based on the facts of each case and the legal standard applied in the relevant jurisdiction.
Courts generally take one of two approaches. Under a narrow interpretation, direct loss reflects the amount of an insured’s money or property directly taken by a dishonest actor. Under a broader proximate-cause approach, a loss may be direct if it would not have occurred but for the dishonest conduct.
These inconsistent standards can lead to very different outcomes.
In National Union Fire Insurance Company of Pittsburgh, Pa. v. Cargill, Inc., an employee manipulated records, causing Cargill to incur approximately $29 million in freight costs it otherwise would not have incurred. The insurer, a subsidiary of AIG, characterized those costs as consequential, but the courts disagreed, finding they flowed directly from the dishonest scheme.
Meanwhile, in Apache Corp. v. Great American Insurance Co., a third party induced the insured to change vendor payment instructions before employees reviewed, approved, and made payments to a fraudulent account. The court denied coverage, treating those intervening actions as breaking the causal chain.
These cases demonstrate why direct loss disputes can be difficult to predict. Losses may be considered direct when they result from a continuous causal chain, while subsequent independent actions may separate an initial deception from the ultimate loss. Policy language, individual facts, and jurisdiction can all affect outcomes.
Putting a number on a loss
Traditional crime losses could be relatively straightforward. If money was physically stolen from a bank drawer, for example, records and surveillance footage could help establish what was present and what was taken.
Modern losses may involve electronic theft, manipulated records, multiple participants, or payments for services never provided. Determining what happened and which financial consequences constitute a covered loss can require significant investigation.
Consider a company providing janitorial services to third parties. In one recent claim, employees overstated the hours they worked, while a manager included “ghost employees” who had not performed services. The customer ultimately determined it had paid for services it did not receive.
But the customer’s overpayment did not necessarily equal the insured’s covered crime loss. The relevant calculation centered on what the insured had paid employees for time or services not received. Lost income was distinct from money actually taken from the insured, requiring investigation instead of relying on the amount reimbursed to the customer.
Building a clear causation story
Rather than simply providing an accounting of damages, policyholders should present a coherent account of how dishonest conduct produced the financial loss. The claim should explain how the scheme worked, how it affected the organization’s actions, and what money or property was lost as a result.
Documenting proof of loss is a critical part of that process. After investigating and quantifying a loss, often with support from forensic accountants or other advisors, an insured generally submits a sworn statement explaining what happened and the amount claimed. How that loss is connected to dishonest conduct can affect the resulting coverage analysis.
Policyholders should also be cautious about unnecessarily restricting their potential recovery. A proof of loss can clearly present the facts and explain why an insured believes a loss is covered without prematurely assigning every element to a particular insuring agreement. That preserves room to evaluate how different parts of a policy may respond as additional facts emerge.
Experience matters when the answer is unclear
Not every dispute over direct and indirect loss can be eliminated through policy wording. In fact, defining “direct” more specifically could sometimes work against policyholders by narrowing the arguments available following a loss.
Specific exposures can sometimes be addressed more affirmatively. Social engineering fraud provides one example. Such losses have historically presented problems because an insured is deceived into voluntarily transferring money rather than having funds physically taken. The insurance market ultimately developed affirmative coverage intended to address that exposure. Certain policies may also address issues such as lost interest and dividends.
But broader direct versus indirect questions remain dependent on individual facts and policy language. That makes claims expertise particularly valuable. An experienced broker can help policyholders investigate and articulate the loss, understand relevant coverage nuances, prepare a proof of loss statement, and preserve potential avenues for recovery as a claim develops.