New York is like approximately twenty-one other states as of this writing that have some version of “ban the box” type laws on the books. The “box” in question is the one found on employment applications that asks if the applicant has ever been convicted of a crime. Different states and jurisdictions structure these laws differently, but the common element is that they prohibit or discourage employers from asking prospective new hires about any criminal history, or doing criminal background checks, at least until the applicant has been otherwise deemed suitable for the position in question and in many cases until after an offer of employment has been made. These laws are well intentioned, seeking to make it easier for convicted criminals to re-enter the workforce and build productive lives, and given the high rates of incarceration here in the U.S. there is a clear social policy justification for them. Nevertheless, in their many iterations across the country they pose significant challenges for employers.
One problem is due to standard wording in many commercial crime and employee dishonesty insurance policies. Standard forms of these policies have provisions excluding coverage for loss caused by an employee who has committed “…theft or any other dishonest act…” learned of by the insured prior to the policy period. The practical effect of this standard policy exclusion was to exclude crime insurance coverage for acts of convicted criminals unless they lied to their employer and concealed their criminal past, another obviously undesirable situation. If the applicant is honest then the employer faces a Catch-22 situation: If the employer complies with applicable “ban the box” laws or regulations and hires the applicant the employer automatically loses any coverage under their crime or employee dishonesty insurance policy for any losses from that employee that might occur in the future. On the other hand, decline to hire the applicant, and it’s an employment practices liability claim waiting to happen.
New York recently enacted a new regulation addressing this issue. Insurance Regulation 209 takes effect on July 1, 2017, and applies to all insurance policies issued, renewed or delivered on or after that date. The aim of the new regulation is to make it easier for employers in New York to comply with the law and hire formerly incarcerated employees, by allowing them to obtain coverage for theft, loss or damage caused by an employee with a criminal history. It does so by prohibiting insurance companies from denying commercial crime insurance coverage to New York businesses knowingly employing convicted criminals. It effectively eliminates the crime policy provision that excludes such coverage, as described above.
Employers, in New York and elsewhere, must already grapple with the challenges and complexities of determining if a prospective employee with a criminal history can be properly and safely employed in a given position. With this new regulation, they gain the assurance that if something goes wrong they will at least have crime insurance coverage to fall back on. Not addressed are any potential liability issues arising from claims by third parties who might suffer injury from such employees. Liability insurance policies should respond to claims like that; they currently have no standard exclusions for claims arising from employed persons with criminal histories, as crime policies do.
Predictable consequences of this new regulation:
Insurance companies writing crime and employee dishonesty policies in New York will have to amend their policies to eliminate the exclusion applying to knowingly employed employees with prior criminal offenses. This coverage carveback will likely have practical insurance repercussions in the future. States and jurisdictions pay attention to what other states are doing; one could reasonably predict that this new regulation will soon be copied elsewhere. And as a practical matter, once the availability of this coverage carveback is established, employers anywhere will probably want it, whether they are in a “ban the box” state or not.
As a result, crime insurance applications will probably become more detailed, as underwriters more closely scrutinize the controls and procedures employers have in place to prevent and detect employee dishonesty losses. Crime insurance premiums have historically been relatively low; increases in premiums might be expected. Limits offered might be reduced, and deductibles increased. We are keeping an eye out for all these possible developments.
This new regulation applies only in New York, but it prods insurers to make a needed change in their employee dishonesty policy forms that could ultimately benefit crime insurance policyholders anywhere.
