A recent lawsuit by the Washington Nationals (the “Nationals”) against its insurance carrier related to the team’s hiring of a player based on false information about his age and identity highlights the importance to sports teams and other businesses of purchasing commercial crime insurance.

In 2006, the Nationals signed a contract with a player that the team believed to be 16-year-old Esmailyn Gonzalez.  The contract included a salary and a $1.4 million signing bonus.

The team later learned that the player really was 20-year-old Carlos Alvarez Lugo.  According to the suit, the player’s older age significantly lessened his value for the team, and the team would not have paid him the $1.4 million signing bonus had it known his true age.

The Nationals had purchased insurance coverage with Westchester Fire Insurance Company, which included $1 million of commercial crime insurance “to protect the Nationals against employee dishonesty, theft, and fraud,” according to the suit.

The suit alleges that two Nationals employees were involved in the team’s hiring of Lugo:  Jose Rijo, a former special assistant to the Nationals’ General Manager, who received a $300,000 kickback from Lugo’s bonus for his participation in the scheme, and Jose Baez, the Nationals’ Director of Dominican Republic Operations.  Both employees were fired for their involvement.

The Nationals submitted a claim to Westchester Fire, alleging that the $1.4 million bonus paid to Lugo was a “complete loss” resulting from the dishonesty of Lugo, Rijo, and Baez.  Westchester Fire denied the claim two years later.  In May 2013, the Nationals sued Westchester Fire in District of Columbia Superior Court.  Westchester Fire removed the case to D.C. federal court earlier this month.

The pending suit will eventually establish the relevant facts, but it would appear that the facts as described by the Nationals should trigger coverage under a typical commercial crime insurance agreement.  Indeed, the Nationals’ excess insurer, Chartis, has already paid “substantially all” of the Nationals’ loss in excess of Westchester Fire’s policy limits, according to the suit.

The dispute highlights the importance for businesses of purchasing commercial crime insurance.  Such insurance addresses exposure resulting from criminal acts such as employee theft; forgery or alteration; theft occurring inside a business premises, such as of money, securities or other property; theft outside a business premises; computer fraud; funds transfer fraud; and money orders and counterfeit money.  The coverage can typically be added to a commercial package policy or purchased as a stand-alone policy.

Basic crime coverage can take one of two forms:  coverage based on when a loss was sustained, or when a loss was discovered.  “Loss sustained” policies cover losses that occur during the policy period and are discovered during the policy period or within an extended discovery period.  “Loss discovered” policies cover losses discovered during the policy period or within an extended discovery period, no matter when the loss occurred.

Because crime-related losses are not typically covered under property insurance policies, commercial crime insurance coverage is recommended for any business.