Crime insurance: Mind the (potential) gap

Visitors to London quickly learn to appreciate the excellent public transportation system. The subway, or tube, is particularly convenient. One constant of the London tube is the recorded voice reminding passengers to “Mind the gap” while getting on and off the trains.

The “gap” refers to the space between the platform and the subway train. Stepping into the gap would be an unpleasant experience indeed.

Insurance has the word “gap” in its lingo, too. A coverage gap refers to an uncovered claim for which coverage either was readily available, or which the insured expected to exist when the policy was purchased. Coverage gaps occur most often when a municipality switches from one insurer to another.

A cynic might believe that one reason insurance policies have so many pages to them, is because somewhere in all that verbiage an insurance company has included language that will create a coverage gap, giving an insurer the right to deny a claim.

But the opposite is more often true. All the language in those hard-to-read insurance policies often creates a symmetry between the policies of different insurers.

To put it another way, insurers are much more likely to differentiate themselves based on price or service, than on coverage. You should expect that the liability, property or crime coverage offered by one insurer generally will be the same as that offered by another, or that any significant differences would be emphasized for you before you buy.

For example, let’s say your city’s coverage with the MML Liability and Property Pool has a limit of $100,000 for employee fidelity (crime) coverage. You receive a quote from another municipal insurance program that includes the same $100,000 limit for crime losses, and the total premium is less. So you leave the Pool for the other program.

A little more than a year later, you discover that an employee has been stealing almost $25,000 from the city for each of the past four years. You notify your insurer of the $100,000 loss, cooperate fully with your insurer in the investigation, and otherwise fulfill all your policy requirements.

Surprise! Your insurer informs you that it will only pay the portion of the loss that occurred after the date you left the Liability and Property Pool. Your current insurer tells you to collect the rest from the Pool.

You contact the Liability and Property Pool, which cites for you the Discovery Clause, a standard clause in crime insurance that allows you to discover and file a claim with the previous insurer up to one year after the expiration date of its insurance. Because your claim was discovered more than 12 months after you left the Pool, your Pool coverage no longer applies.

You have a gap in coverage of more than $50,000. Why weren’t you told this before you changed insurers?

Insurance is not supposed to work this way.

Almost all crime insurance policies contain a standard provision that closes this gap. This provision states, in essence, that if your new insurance replaces a previous insurer and the Discovery Clause of the previous insurer expires, the new insurance will cover the loss occurring prior to its inception date, up to the limit of the previous insurer’s coverage.

But not all Michigan municipal insurers have this clause. At least one has amended its crime form to delete this language and create a potential, unnecessary coverage gap.

How would you feel? You receive a proposal that quotes you $100,000 of employee theft insurance. You pay the premium quoted. You have a loss. Only then are you told that you don’t have $100,000 of employee theft coverage.

You might want to add one question to your annual insurance review with your insurance representative. “Will the limits of insurance I purchase be available from the inception date of coverage?”

If your insurance representative looks puzzled by the question, just say that you’re minding the gap.