Check four things about the crime coverage in the business you bought: whether a crime policy exists at all, which kinds of theft and fraud it lists, whether it covers losses by when they are found or when they happen, and whether its limits match the money and property your staff can reach. Commercial crime insurance pays the business for its own direct losses from theft, forgery and fraud, starting with theft by its own employees. This guide is for new owners who do not yet know the team and want to know whether the seller's coverage would pay if someone has been stealing.
The short answer
- Many owner-run businesses have no crime policy, or only a small employee dishonesty add-on to a package policy. Check before you assume.
- Employee theft, forgery, computer fraud and funds transfer fraud are separate coverages (insurers call them insuring agreements), each with its own limit. Social engineering (an employee tricked into sending money) is often excluded or carries a lower sublimit.
- A discovery form covers losses found during the policy period; a loss sustained form covers losses that happen during it. The difference matters when ownership and policies change.
- Size the employee theft limit to what one trusted person could take before anyone noticed, not to what the seller happened to buy.
- If the business sponsors a 401(k), federal law generally requires a bond for the people who handle plan money; confirm the details with your benefits advisor.
What does a commercial crime policy cover?
A commercial crime policy is first-party insurance: it pays the business for money, securities and property it loses to crime. It is built from separate insuring agreements, and a policy covers only the ones listed on its declarations page with a limit next to them. The Insurance Services Office (ISO) revised most of its standard crime forms in 2022, and carriers also use their own forms, so names and details vary.
| Insuring agreement | What it covers in plain terms | What to ask |
|---|---|---|
| Employee theft (fidelity) | Money or property stolen by your employees | Does it include theft of clients' property and benefit plan coverage? |
| Forgery or alteration | Forged or altered checks drawn on your accounts | Is the limit close to your largest checks? |
| Inside the premises | Money stolen from your locations, robbery and safe burglary | Does it fit the cash you hold on busy days? |
| Outside the premises | Money lost while an employee carries it, such as a bank deposit | Who makes deposits, and how much at once? |
| Computer fraud | Money or property taken through fraudulent entry into your systems | How does it interact with your cyber policy? |
| Funds transfer fraud | A fraudulent instruction to your bank, sent without your knowledge, to move your money | Does it apply only to instructions you did not send? |
| Fraudulent impersonation or social engineering | An employee tricked into sending money to a fake vendor or a fake executive | Is it included at all, and what is the sublimit? |
A property policy usually does not fill this gap; many property forms exclude dishonest acts by employees. See the commercial property review.
Why should a new owner look hard at employee theft?
In many owner-run businesses the seller was the main control against theft, and that control leaves at closing while long-tenured staff with broad access stay. Ownership changes are also when old schemes come to light, because new eyes look at the books. Employee theft when you do not know the team yet covers the schemes to look for and the controls to add in month one; this guide is about whether the policy would pay.
Insurance can pay for covered losses; it does not stop them. Pair the policy review with basic controls such as dual approval of payments, separate duties for paying and recording, and a monthly review of bank activity.
Does it matter when the theft happened or when you found it? (Discovery vs loss sustained)
Crime policies use two triggers, a little like claims-made and occurrence in liability insurance:
| Question | Discovery form | Loss sustained form |
|---|---|---|
| Which losses are covered? | Losses discovered during the policy period, even if the theft started earlier | Losses that happen during the policy period and are discovered during it or within a set period after |
| Theft that began years ago | Can respond, subject to the form and any retroactive date endorsement | Only the part that happened during covered periods, under the rules for prior coverage |
| Switching carriers | Standard wording is designed to avoid overlapping with the old policy's extra time to discover losses, so each loss falls under one policy | Can cover some losses from the old policy's period if the new policy replaced it with no gap and the loss would have been covered then, usually up to the lower of the two limits |
For a buyer, the deal structure shapes the answer. In a stock purchase the same company and its policy continue, so the form type and any change in ownership condition decide how a theft that started under the seller is handled. In an asset purchase, money stolen before closing was generally the seller's loss, and your recourse runs through the purchase agreement; your new policy is about losses to your company after closing, including schemes that simply keep running. Ask your broker to confirm in writing how a theft spanning the closing date would be treated, and ask deal counsel about the seller's indemnity.
Is the employee theft limit high enough?
There is no standard formula. A practical approach is to estimate what one trusted person could take before anyone noticed, and to remember that internal theft often runs for months or years. Work through these exposures with your controller or accountant:
- Peak cash and checks on hand, and the size of deposits
- The largest payment runs, wires and payroll cycles, and who can release them
- Customer payments one person can receive, record and reconcile
- Inventory or equipment that is easy to resell
- Customers' property your staff can reach in homes, offices or data systems
- Benefit plan assets, such as a 401(k)
Many crime forms, including the standard ISO forms, treat a series of thefts by one employee, or by several acting together, as one occurrence. A scheme that runs for years is usually capped at a single per-occurrence limit, not one limit per year, so size the limit to the whole scheme, not to one year of it.
A hypothetical example. A buyer acquires the stock of an office technology services company whose technicians install and repair equipment after hours in client offices. The only crime coverage is a $25,000 employee dishonesty endorsement on the package policy, and it covers only the company's own property. Three months after closing, a technician is caught taking laptops and cash from a client's office over several weeks, about $40,000 in all. The client's contract requires the company to reimburse losses caused by its staff and to carry crime coverage for clients' property at $100,000. Nothing in the inherited coverage responds to the client's loss, so the buyer pays it from operating cash to keep the account. A crime policy that included employee theft of clients' property, at the limit the contract required, would have turned that into an insurance claim, subject to the policy's terms.
For a benefit plan, federal law sets a floor. The U.S. Department of Labor says the Employee Retirement Income Security Act (ERISA) generally requires people who handle plan funds to be bonded for at least 10 percent of the funds they handle. The minimum bond is $1,000. The maximum required is $500,000 per plan, or $1,000,000 for plans holding employer securities. Under the 2022 ISO forms that coverage must be chosen separately, so confirm it is there.
Will the policy pay if an employee is tricked into wiring money?
Often not, unless you bought coverage for it. Funds transfer fraud coverage, in its long-standing wording, covers instructions to your bank that you did not send. When your own employee sends the money after a convincing fake email from a vendor or the new owner, many policies treat it as a voluntary transfer and exclude it. Courts have reached different results on different wording, which is why the label on the coverage matters less than the definitions.
Fraudulent impersonation or social engineering coverage fills part of that gap, usually at a lower sublimit than the rest of the policy, and often with a condition that the employee verified the request by a method other than the original email, such as a call to a known number. Cyber policies sometimes offer similar coverage, so check both and avoid paying twice. See funds transfer fraud and new owners and the cyber review.
Which exclusions and conditions catch new owners?
- Theft by owners: theft by you, your partners or members of your company is usually excluded. Crime insurance protects the business from employees and outsiders, not from its owners.
- Known dishonesty: coverage for an employee typically ends once a designated person (often an officer or manager) or, in some forms, a human resources employee learns of that employee's dishonest act. A seller's prior knowledge can matter, so ask the seller directly about past incidents.
- Who counts as an employee: temporary, leased and contract workers may or may not be included. Check the definition against how your staff is actually engaged.
- Inventory shortages: many forms do not accept a shortage found only by counting inventory as proof of theft.
- Indirect loss: crime policies pay for the property lost, not for lost profits. Some include a small amount for the cost of proving the loss.
- Deadlines: notice and proof of loss conditions are strict. Report suspected theft to the carrier promptly, even before you know the amount.
Crime coverage is often bought with directors and officers (D&O) and employment practices coverage in one management liability package; see the D&O review. Morrow can review the crime coverage you inherited against your payment flows and request quotes where it makes sense.
Keep reading
- Employee Theft After You Buy a Business and Don't Know the Team Yet
- Funds Transfer Fraud: Why New Owners Are a Favorite Target
- New Owner Review: Cyber Insurance
- New Owner Review: Directors and Officers (D&O) Insurance
- 15 Coverage Gaps New Owners Find in Owner-Run Businesses
- All guides for new business owners
Frequently asked questions
Does my property insurance cover theft by an employee?
Usually not, or only for a small amount. Many property forms exclude dishonest acts by employees, and some package policies add a small employee dishonesty endorsement. Check the declarations page for a crime or employee dishonesty limit.
If the bookkeeper stole from the seller before closing, can my policy pay for it?
Usually not in an asset purchase, because the money taken before closing was generally the seller's loss and your recourse is the purchase agreement. In a stock purchase the company's own crime policy may respond depending on its form and timing. Ask your broker and deal counsel.
Does crime insurance cover my employee stealing from a customer?
Only if the policy includes coverage for clients' property. Service businesses whose staff work in customers' homes, offices or systems should ask for it specifically, because customer contracts sometimes require it.
What is the difference between crime insurance and a surety bond?
Crime insurance protects your business from its own losses to theft and fraud. A surety bond protects a third party, such as a customer or government agency, and the surety expects your business to repay any claim it pays. Contracts that ask for a janitorial or business service bond usually mean a third-party fidelity bond, which pays clients for proven theft by your employees; crime coverage for clients' property can do a similar job with different terms.
Does my company's 401(k) plan need a bond?
Federal law generally requires people who handle plan funds to be bonded for at least 10 percent of the funds they handle, within set minimums and maximums. Confirm the bond exists and names the plan, and ask your benefits advisor about the details.
References
- IRMI: Need to Know, Major Changes to the ISO Commercial Crime Program
- IRMI: Crime, Getting More Out of the Policy
- The D&O Diary: Voluntary Parting Exclusion Precludes Coverage for Social Engineering Fraud Loss
- U.S. Department of Labor: Field Assistance Bulletin 2008-04 (ERISA bonding)
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.