Employee Dishonesty Claims—How Far Back Does Coverage Extend?

When businesses think about protecting themselves from risk, they often focus on property damage, natural disasters, or customer lawsuits. However, one of the most damaging and often overlooked threats comes from within: employee theft. No matter the size of your business, a dishonest employee can cause massive financial harm—and many business owners find out too late that their insurance may not cover all the losses. A recent federal court decision out of Kansas helps explain why understanding the limits of your employee dishonesty coverage is so important. ¹

The case involved the Kansas Masonic Foundation (KMF), a nonprofit organization that experienced a staggering loss over several years. In 2022, KMF discovered that its accounting manager, Sylvia Obaya, had been writing and cashing unauthorized checks made out to herself. Obaya also altered the company’s bookkeeping to hide the theft. The fraud went undetected for years, from as far back as August 2015 until it was finally discovered in September 2022. By then, she had taken more than $550,000. KMF immediately reported the theft, terminated the employee, and began the difficult process of recovering its losses.

KMF did what many businesses do to protect themselves. It maintained continuous insurance coverage that included crime and employee dishonesty coverage. From 2013 to 2020, KMF was insured through Cincinnati Insurance and New Hampshire Insurance. Then, starting in July 2020, KMF switched to Auto-Owners Insurance Company and kept coverage through 2023.

After discovering the theft, KMF filed a claim with Auto-Owners. The insurer paid out about $137,000, which covered losses that occurred after July 1, 2020—the start of Auto-Owners’ first policy. However, when KMF tried to recover an additional $410,000 for losses that occurred before 2020, Auto-Owners denied the claim. KMF argued that their current policy should provide coverage for earlier losses under something called a “prior loss provision,” which can extend coverage if a new policy immediately follows a prior one. Since KMF had maintained continuous coverage and had not discovered the theft until 2022, they believed they should be covered under the terms of their policy.

Auto-Owners, however, disagreed. The insurance company argued that the prior loss provision only applied to losses that occurred during the immediately preceding policy period—that is, the one right before the current policy. In this case, that would have been Auto-Owners’ own 2021–2022 policy. Because the thefts KMF was claiming happened years before that, during the New Hampshire and Cincinnati policy periods, Auto-Owners said those losses fell outside the coverage limits. They explained that the policy had a one-year discovery window, and the prior loss provision could not be used to reach back endlessly into older policies from different insurers.

The court agreed with Auto-Owners. In its ruling, the court said the language of the policy was clear: For a loss under a prior policy to be covered, that prior policy had to end when the new one began. In other words, the current policy could only cover losses from the immediately prior policy, not multiple layers of prior insurance. The court rejected the idea that coverage should be stacked across all past policies, saying that would ignore the plain wording of the contract. The judge also pointed out that Auto-Owners had already used the prior loss provision to cover losses from 2020 to 2022—something it wouldn’t have done if that provision had no meaning.

Part of the policyholder’s argument was valid—“any prior insurance” seems broad. The court’s order could be criticized for finding that the term “clearly” referred to just the prior policy since the policy language did not say “the prior insurance policy.”

Researching industry materials on this issue, IRMI does not say that coverage extends back indefinitely. Its discussion about employee theft extension for previous coverage states:

Extension for Previous Coverage

Coverage also applies to loss that would have been covered under a prior policy except that the discovery period had expired, provided that certain criteria are met. This is established in the “extension for previous coverage” provision of the crime general conditions coverage part form (CR 0100).

Without such a provision, a loss from acts that occurred during a previous policy period but were not discovered until after that policy’s discovery period had terminated would be uninsured. The insurer that issued the previous policy would not be obligated to pay since its policy’s discovery period had terminated, and the present insurer would not be obligated to pay because the acts causing the loss did not occur during its policy period.

For coverage to apply to acts committed during a prior policy period, both the current and the prior policy must provide coverage for these acts. Also, the current policy must take effect at the time of the termination of the previous policy. Therefore, it is important that the termination date and hour of the prior policy exactly match the inception date and hour of the replacement policy.

The limit applicable to this coverage extension is the lesser of the limit applicable under the prior policy or the limit applicable under the current policy—unless the insurer for the current policy also issued the prior policy. In that case, another provision in the crime general provisions form (the “loss under previous coverage provided by us” provision) establishes that the amount payable is the greater of the limit applicable under the prior policy or the limit applicable under the current policy.

I would be curious from agents or risk managers if coverage is available for a fact pattern in this case. Some employee theft actions go undetected for years.

What can businesses learn from this case?

First, employee dishonesty is a very real threat. It doesn’t just happen in big companies. Small and midsize businesses can be especially vulnerable because they often lack strong internal controls and may place a lot of trust in a few key employees. Second, this kind of fraud is often hard to detect, and by the time it’s discovered, years may have gone by. That’s why insurance coverage for employee theft, computer fraud, and other forms of commercial crime is so important.

But just buying coverage isn’t enough. Business owners need to understand what their policies actually cover and what they don’t. As this case shows, policies have strict time limits for when losses must be discovered and how far back coverage can extend. Switching insurers can also complicate matters, especially if losses occurred under older policies that no longer apply.

Every business, no matter the size or industry, should have a conversation with a knowledgeable insurance agent about crime coverage. Ask about employee dishonesty insurance, computer fraud protection, and what happens if a loss is discovered years after it occurs. These are not pleasant topics, but they’re necessary. A single dishonest act can undo years of hard work. Insurance should be there to help you recover if you have the right protection in place.

Thought For The Day

“Trust, but verify.”
— Ronald Reagan

¹ Kansas Masonic Foundation v. Auto-Owners Ins. Co., No. 5:24-cv-04029 (D. Kan. Apr. 14, 2025).