Crime / Fidelity / Bond / 3D / Employee Theft / Financial Institution Bond / Fraud Insurance

June 16, 2015 | smeditor

Denial of Crime Coverage for Misrepresentation

Like most types of insurance coverage there can be many names within the same family of insurance policies. I will use them indiscriminately in this post, because it helps with Search Engine Optimization.

There are also a number of terms directly associated with the Bond, including but not limited to, ‘material non-disclosure’,  omission, concealment, misrepresentation, ‘incorrect statement of material fact’, and ‘false information’, and these terms are used with respect to the application for insurance that forms part of the 3D policy (Dishonesty, Disappearance, Destruction), and for the grounds for rescission of the Fidelity policy.

Denial of coverage by way of Cancellation ab initio (from the beginning) based on alleged misrepresentation in the application for Fraud insurance is far too common in Canada. There are many precedent setting cases and many more unknown situations not determined in court. The result can be catastrophic for the insured corporation, and for the individual directors and officers who had no knowledge of or involvement in the alleged misrepresentation.

Most Crime insurance applications require the signature of the Chairman and the CEO, or next highest person if the Chm and CEO are the same person. The concern here is that alleged misrep by the highest executives of the firm will at minimum fall within American jurisprudence which follows the “sole representative” doctrine, and therefore the knowledge of such will be imputed to the principal.

However, if the board of a corporation adopted the policy to select an independent committee to review the insurance application and have a fully independent director sign the application (in addition to the executive , because the underwriter might not accept an application signed only by a non-employee of the firm), it could improve the chances that a misrep by any of the signers would fall within the exception to the principal / agent rule because the fraud would have been perpetrated on the principal not on the Insurer (see. Bowstead on The Law of Agency, 15th ed. (Toronto: Carswell, 1985), p. 414, states that the presumption that knowledge will be passed on to the principal may be nullified by proof that the agent was defrauding the principal in that transaction.) They can assert that misrep by the executive in the application was the intent to further their fraud against the principal, especially in a regulated industry where the purchase of a bond is mandatory, not optional, and therefore more difficult for the insurer to suggest the misrep in the application for the FIB by the allegedly fraudulent executive was an obvious attempt to induce the insurer to provide a policy and perpetrate a fraud against the insurer.

There is also inconsistency between insurers with respect to the questions in their applications. Some applications do not specifically ask “are you aware of any claims or potential claims”,  but they will rely on the representations regarding ‘past losses’ (whether or not there was reimbursement), or previous cancellation of a Bond or denial of coverage. Therefore, the policy improvements or limitations may be found in the application.

Risk of rescission, cancellation, non-renewal or claim denial is present within any policy renewal, even if staying with the same insurer, because the application is completed each year. This risk increases if the buyer does not cover all their bases when changing insurance carriers, or when increasing the limits of liability. Some insurers will ask for an ‘increased limits warranty statement’ asking if the buyer knows of any situation which could lead to a claim under the proposed policy. Others will rely on the representations made in the renewal or new business application.

Current regulatory changes in Canada will significantly increase this risk because the Canadian Securities Administrators’ National Instrument 31-103 has come into effect, requiring many financial institutions (investment dealers, investment advisors and investment funds) to register or re-register, demanding new bond coverage in addition to working capital and other requirements. The result is companies buying new policies, where they never had before, or buying substantial increases in their limit (in some cases the $200,000 limit needs to be $10 million.)

The big concern is that poor explanation or negotiation of the new policies or new limits will not be known until a loss is discovered and a claim is made. Only at this point will you realize that your $5,000 premium savings cost you $5 million in insurance coverage.

For risk management techniques, loss control tools, and coverage enhancements, please feel free to call me directly.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626,

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to

About the Author