Diligent and prescient risk managers can seek to combat corporate fraud, but hopefully none would take offense at a reminder that fraud reduction, not outright prevention, is all that reasonably can be expected. Because the greed and creativity of white collar criminals seems to inevitably find an outlet, some risk managers will be forced to submit claims under fidelity bonds and commercial crime insurance policies. As greater prevention leads to more creative criminals, the direct loss defense will continue to be a focus of such claims.
Whenever the chain of causation involves more than a perpetrator simply pocketing cash from the company coffers, commercial crime or fidelity bond insurance companies typically reserve rights or deny coverage. The insurance company will contend that the loss does not result directly from a covered cause and therefore fails to meet the definition of “loss” or comes within an exclusion for indirect loss. The insurance industry’s favored formulation that “direct means direct” has succeeded in certain instances involving particularly attenuated facts, but policyholders should know that other courts rightly reject that circular reasoning.