promotions, awards, profit sharing or
pensions or other employee benefits
earned in the normal course of business.
Nuances to the “Prior
Assuming an employee’s actions satisfy
the prerequisites for triggering coverage,
employers should pay close attention to
a policy’s prior knowledge exclusion.
The prior knowledge exclusion has three
nuances that frequently result in a denial
• Nuance 1: Coverage for subsequent dis-
honest acts. An employer’s decision to
excuse or forgive an employee’s first act
of dishonesty constitutes prior knowl-
edge. If the same employee commits a
subsequent act of theft or dishonesty,
the subsequent act will not be covered.
• Nuance 2: Employees identified to pos-
sess prior knowledge. Generally, the
prior knowledge exclusion prohibits
recovery if anyone employed by the
company has knowledge of the fraudu-
lent activity. Technically, an employee
who is intentionally, fraudulently and
dishonestly stealing money from an
employer has prior knowledge of the
dishonest act he or she is committing.
Policyholders must be diligent in re-
viewing a policy’s exclusionary language
and negotiating less restrictive language
that protects their interests. It is possible
for the employer to negotiate an alterna-
tive with the insurer to limit the prior
knowledge exclusion to the CEO, CFO
and/or general counsel — meaning the
exclusion will only apply if any of these
specific people have prior knowledge,
as compared to anyone employed in the
•Nuance 3: The definition of “
knowledge.” Though on its face, the prior
knowledge exclusion, only purports to
exclude known behavior, a Kansas Court
expanded this definition to include insurer investigations into potential fraud.
The thinking definitional expansion is
that the insurer had a reasonable expectation that dishonest acts occurred and,
therefore, the prior knowledge existed.
Given the specificity of the prerequisites of Employee Dishonesty Coverage
and the highly nuanced prior knowledge exclusion, employers must do their
homework. Engaging an experienced
broker and coverage counsel to review or
audit an Employee Dishonesty Coverage
policy can provide added protection.
Frank Cragle is a trial lawyer and
member of the insurance recovery team
and data privacy and security practice at
Hirschler Fleischer (Richmond, Va.). He
handles a variety of commercial business
disputes, including insurance recovery
and policyholder claims. Cragle also
devotes a substantial portion aof his
time to business tort litigation. He may
be reached at firstname.lastname@example.org.
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