What Does “Dishonest Act” Mean in a Contract?
A dishonest act in the context of employment contracts and insurance policies refers to conduct involving intentional fraud, theft, misrepresentation, or deception — behavior deliberately contrary to the honesty and good faith expected in a business or employment relationship.
The term appears in two main contexts that affect Illinois businesses differently: as a termination trigger in employment agreements, and as an exclusion or coverage trigger in commercial insurance policies.
Dishonest Acts in Employment Contracts
Employment contracts — particularly for executives, fiduciaries, and employees with access to company finances — often include “dishonest act” or “dishonesty” as a basis for termination “for cause.” This matters because termination for cause typically forfeits severance, unvested equity, and other departing benefits.
What Qualifies as a Dishonest Act in Employment Agreements
Common definitions in Illinois employment contracts include:
- Theft or misappropriation of company property or funds
- Falsification of business records, expense reports, or timesheets
- Material misrepresentation to the company, its board, or clients
- Bribery or kickbacks
- Unauthorized disclosure of confidential information for personal benefit
- Fraudulent conduct in connection with the employee’s duties
Intent is central. A mistaken entry on an expense report is not a dishonest act. Intentionally inflating expenses for personal gain is. Illinois courts examine whether the employee acted with knowledge that their conduct was false or deceptive.
Why Precise Definition Matters
If your employment agreement defines “cause” broadly to include “dishonest acts,” employees terminated on that basis will challenge whether their conduct actually qualifies. Vague definitions invite litigation. Best practice: define “dishonest act” specifically in the contract — list the categories of conduct that qualify rather than relying on the term alone.
Dishonest Acts in Commercial Insurance Policies
In commercial insurance — particularly fidelity bonds, crime policies, and directors & officers (D&O) insurance — “dishonest acts” provisions work differently depending on whether the policy covers or excludes them.
Fidelity Bonds and Crime Policies
Fidelity bonds and commercial crime insurance are specifically designed to cover losses from employee dishonest acts — theft, embezzlement, fraud. For these policies, the definition of “dishonest act” is a coverage trigger: you need to show the loss resulted from a dishonest act to collect.
Key elements insurers typically require to establish a covered “dishonest act”:
- Intent — the act was deliberate, not negligent
- Personal benefit — the employee acted to gain personally (or to benefit a third party at the company’s expense)
- Manifest evidence — some policies require a criminal conviction; others require only a preponderance of evidence
D&O Insurance Exclusions
Directors & officers policies typically exclude coverage for claims arising from dishonest acts — meaning if a director or officer commits fraud or intentional misconduct, the D&O insurer won’t cover the resulting claims. These exclusions are usually conditioned on a final adjudication: coverage is maintained during defense of the claim, and the exclusion only applies after a court or jury finds that a dishonest act occurred.
Practical Implications for Illinois Employers
- Define dishonest acts in your employment agreements — don’t rely on the bare term
- Have a fidelity bond or crime policy if employees handle company funds — employee theft is more common than most employers expect
- Document suspected dishonest acts thoroughly before termination — you’ll need the documentation to defend a wrongful termination claim and support an insurance claim
- Consult an attorney before terminating for dishonesty — the legal and insurance implications of the characterization matter
Fitter Law advises Illinois employers on employment agreements and workforce matters. See our employment law services and view our subscription plans.
Frequently Asked Questions
Can an employee be fired for a dishonest act without proof of a crime?
Yes. Employment termination for dishonesty in Illinois doesn’t require a criminal conviction or even a criminal charge. The employer’s standard is civil: a reasonable, good-faith belief based on adequate investigation that the employee committed a dishonest act. Document your investigation and findings thoroughly.
Does “dishonest act” include lying on a job application?
Generally yes, if discovered later and if the misrepresentation was material to the hiring decision. Many employment agreements include misrepresentation in the employment application as a terminable offense. Whether it constitutes a “dishonest act” under a specific contract depends on the definition in that contract.
How does an insurer determine whether a dishonest act occurred for fidelity bond purposes?
Insurers investigate using the civil preponderance standard in most cases — meaning it’s more likely than not that a dishonest act occurred. They examine financial records, interview witnesses, and may require cooperation with law enforcement. The burden is on the insured to prove the loss resulted from a covered dishonest act.