What the Form Is
The CR 50 05, titled "Policy Bridge; Discovery Replacing Loss Sustained," is an endorsement used in Commercial Crime insurance. Its fundamental purpose is to address and prevent potential gaps in coverage when an insured organization transitions its crime insurance from a "loss sustained" policy form to a "discovery" policy form. A "loss sustained" policy typically covers losses that are both sustained (occurred) and discovered during the policy period, or sustained during the policy period and discovered within a specified time after its expiration (often one year). In contrast, a "discovery" policy covers losses that are discovered during its policy period, regardless of when the loss actually occurred, though often subject to a retroactive date. The CR 50 05 endorsement helps to cover losses that were sustained before the inception of the new discovery policy but are only discovered during the term of this new discovery policy, and which might otherwise fall into a coverage gap between the two different policy triggers.
Classes of Business It Applies To
This endorsement is relevant for any commercial entity that carries crime insurance and is making the switch from a loss sustained to a discovery coverage basis. Crime risks, such as employee theft, forgery, or computer fraud, are prevalent across a multitude of industries. Therefore, this endorsement can be applicable to a wide array of businesses, including but not limited to:
- Financial Institutions (though they often have specialized forms)
- Retail Operations
- Manufacturing Companies
- Healthcare Providers
- Non-Profit Organizations
- Service Industries
Real-world example: A manufacturing company has had a "loss sustained" crime policy for several years. They decide to switch to a "discovery" form for broader potential coverage for past unknown events. Six months into the new discovery policy, they uncover an embezzlement scheme that started 18 months prior (during the old "loss sustained" policy period) but was not discovered until now. The CR 50 05 endorsement would help provide coverage for this loss, which might otherwise be denied by the new discovery policy (if the loss occurred before its retroactive date and wasn't discovered during the old policy's discovery tail period) or the old loss sustained policy (if discovery was outside its reporting window).
Special Considerations
There are several important points to consider when utilizing the CR 50 05 endorsement:
- Necessity at Transition: It is a critical endorsement when an insured changes their crime coverage trigger from loss sustained to discovery to prevent uninsured losses.
- Interaction with Policies: The specific wording of the endorsement will detail how it interacts with both the expiring loss sustained policy and the new discovery policy. This includes any time limitations for the discovery of losses that originated under the prior policy.
- Underwriting Scrutiny: Insurers may require a thorough underwriting review of the insured's prior loss history and internal controls before agreeing to add this endorsement, as it can pick up previously unknown losses.
- Retroactive Date: The retroactive date, if any, on the new discovery policy is a key factor. This endorsement is designed to work in conjunction with the new policy's terms to provide a seamless transition.
Real-world example: If a company is switching to a discovery crime policy and the insurer is setting a retroactive date that is the same as the new policy's inception date, the CR 50 05 becomes even more crucial to cover losses sustained before this date but discovered after.
Key Information for Agents and Underwriters
For Agents:
- Client Education: It's vital to clearly explain the fundamental differences between "loss sustained" and "discovery" crime coverage triggers to clients.
- Gap Prevention: When a client is moving to a discovery form, offering the CR 50 05 is essential to protect them from potential coverage gaps and to mitigate the agent's own Errors & Omissions (E&O) exposure.
- Functionality: Ensure the client understands how the bridge endorsement works to provide continuity of coverage during the transition.
For Underwriters:
- Risk Assessment: Even with the CR 50 05, underwriters must carefully assess the risk associated with prior acts when issuing a discovery form. This involves reviewing the applicant's loss history, employee turnover, internal financial controls, and the nature of their business.
- Transitional Tool: Recognize that this endorsement is a tool to manage the change in coverage triggers. It doesn't eliminate the underlying crime risk but helps define how it's covered during the transition.
- Pricing Considerations: The premium for the new discovery policy, and potentially for this endorsement, might be influenced by the perceived risk of uncovering prior, unknown losses.
- Clarity on Prior Coverage: Obtain details of the expiring loss sustained policy to understand the potential for losses that might be picked up by the CR 50 05.