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So What Does Your Fidelity Policy Actually Cover?

By John N. Ellison and Luke E. Debevec
February 29, 2008

Businesses purchase fidelity insurance to cover their losses from crime such as employee theft and forgery. This need is usually most pronounced for banks and other financial service firms, where employees have access to enormous amounts of money. For these policyholders, misplaced trust in a resourceful employee can result in millions of dollars disappearing from the policyholder or its clients with only a few keystrokes. When policyholders turn to their fidelity insurance for relief, these businesses then learn that they may have misplaced their trust in their insurance companies, too. All too often, policyholders have to fight for the coverage they reasonably expected.

In perhaps the most widely repeated example, an insurance company will offer a business a fidelity policy for 'direct loss' of money due to theft or forgery. When an employee of the business steals a client's money or goods, or enriches herself through a forged document, and the business pays for its client's loss, most reasonable policyholders would think that the fidelity policy would provide relief. There was a dishonest act by an employee that directly resulted in the need to repay a client. Indeed, many businesses view this situation as the prototypical example of what they intended to insure against when purchasing a fidelity policy. Business reality is that under the doctrine of respondeat superior, employers are almost always strictly liable for losses caused by their employees' and agents' actions. When an employee steals from a client, the employer's responsibility to pay the loss follows like night follows day. However, insurance companies usually take the surprising position that the policyholder's loss was not 'direct,' and therefore is not covered at all.

A Reality-Denying View

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