(September 2012)

E. CONDITIONS

1. Conditions Applicable to All Insuring Agreements

k. Loss Sustained During Prior Insurance Issued by Us or Any Affiliate

Note: The Loss Covered Under This Insurance and Prior Insurance Issued by Us or Any Affiliate condition is removed and replaced by wording in Section B, Limit of Insurance (05 06 change).

A person or persons may perform numerous dishonest acts over a period of years before being caught, but all such acts are considered one occurrence. If the insured maintains continuous coverage with the same insurer or group of insurance companies, coverage applies back to the inception date of the continuous coverage. However, the policy limits do not accumulate because of the multiple years. Instead, the highest limit available during the total period is available to settle the total loss over the years in which they occurred. Because of some confusion and court cases, such as Auto Lenders Acc Ace. Corp.v Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378 2004, the condition now has three parts and includes three examples.

• If a loss is sustained in part during the current insurance and in part during prior policies and there was no break in coverage, the loss in the current policy period is settled first and the losses in the prior periods are then settled.

• If a loss is sustained entirely during a previous policy period, there was no break in coverage between the date of loss and the current policy, and the current policy covers the loss, the insurance company settles the loss under the most recent previous insurance first and then settles the remaining amounts during previous insurance.

• Any settlement is made as follows:

• The highest single limit of insurance available during any policy period when the loss occurred is available for the loss.

• No settlement is paid until the deductible that applies under the current policy is satisfied. That deductible is the only one applied to the entire loss settlement, regardless of the number of policy periods involved.

Note: While the language in this condition is lengthier than what existed in previous form editions, the intent is unchanged.

Examples: An employee has been stealing from Below Ground Enterprises for three years. The insured discovers the loss this year and calculates the amount at $100,000.   Scenario one: The limit of insurance on the current policy is $100,000 but was only $25,000 three years ago. The loss payment is $100,000. Scenario two: The limit was reduced two years ago from $100,000 to $25,000. The insured is still eligible for the $100,000 loss payment because the limit of insurance at the time of the occurrence was $100,000.

Example: Alice stole $50,000 two years ago, $20,000 last year and $30,000 this year (total theft of $100,000). Alice's employer maintained a $50,000 coverage limit in each of these three years. These limits cannot be added together even though the dishonest acts took place during each of these years. Why, because this provision treats the series of thefts as a single occurrence. The maximum limit available for this one occurrence is $50,000.

l. Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate

This condition applies only if there was no lapse in coverage between the current coverage and the previous coverage. Even a one-day lapse in coverage nullifies this important benefit. If a loss sustained in a previous policy term is discovered after the end of that policy's discovery period, coverage applies under the current policy if both the old and new policy have the same coverage and one immediately replaces the other. The limit of insurance available is the lesser of the two policy limits.

Example: Number One, Inc. moved its coverage from STU Accident and Casualty Insurance Company to the ABC Indemnity Company. It had been with STU for five years. Number One discovered a loss that occurred during the STU policy but after the discovery period expired. ABC Indemnity covers the loss for either the limit of insurance under the STU policy or the limit under their policy, whichever is less.

The coverage available under this condition cannot be combined with the coverage available under Condition k. to increase the insurance limits. The limits under Condition k. are taken into consideration with the limits of the previous company and the lesser is the one chosen.

The important distinction is that if coverage stays with one company or group, the highest limit is used to settle claims. If coverage moves between companies, the lowest limit is used to settle claims. This creates a significant coverage gap if an insured changes insurance companies.