Employee Dishonesty Insurance

Many employers do not realize how vulnerable they are to financial loss caused by the fraudulent acts of their employees. A common response from an employer is, “My employees are like family, they would never steal from me,” or, “My business isn’t the type where employees steal anything.” How wrong they are!

Every year, millions of dollars are lost due to employee dishonesty. Many businesses suffer severe financial damage and, in a number of cases, even end up in bankruptcy. It’s not uncommon when reading the paper to see articles about the long-time, trusted employee who has been siphoning money out of the employer’s business for years. While some acts are one-time thefts, most large losses are caused by long-term, ongoing schemes that are cleverly hidden for years.What can employers do to protect themselves from this risk? There are two steps that should be taken. The first step is to establish a loss prevention program. The second step is to obtain employee dishonesty insurance.A loss prevention program for employee dishonesty involves many factors. It’s important to understand the causes behind most claims in order to help prevent them. Three areas have been proven to be key factors: opportunity, financial or emotional pressure, and employee attitude.

■Opportunity – Even the most honest employee can be tempted to steal if proper controls are not in place and if given the opportunity.
■Pressure – Economic pressures caused by such things as drug or alcohol dependency, gambling problems, divorce, and serious illness can create a situation where an employee becomes desperate enough to steal.
■Attitude – An employee who feels they have been treated unfairly may think that the company owes them something and they have a right to take it. This often occurs when someone doesn’t get the raise or promotion they feel they deserve or when the company starts layoffs and they think they are going to lose their job.
The following steps can be taken to monitor and control these situations:

1.Institute an internal audit system for all financial records.
2.Have an independent accountant perform a full audit annually.
3.Make sure that bank accounts are reconciled by someone other than those who handle deposits and withdrawals.
4.Have countersignature procedures for checks.
5.Make sure there is joint handling of any securities.
6.Have strict security procedures for all computer operations.
7.Institute formal management procedures.
8.Institute a formal employment policy for hiring new employees.
In addition to implementing a loss prevention program, an employer needs to purchase employee dishonesty insurance to provide coverage for any losses that do occur. Employee dishonesty insurance protects the employer from financial loss due to the fraudulent activities of an employee or group of employees. For a loss to be covered, the employer must suffer financial loss and the employee must either obtain financial benefit from the act or direct financial benefit to another person or organization. The loss can be the result of the employee’s theft of money, securities, or other property of the insured. Most employee dishonesty insurance policies are written on a blanket basis so that all employees are covered.There are some restrictions to the coverage that are important to know. The definition of employee in most policies is limited to persons in the employer’s service that are compensated directly by salary or commissions and who the employer has the right to direct and control while performing their duties. This does not include people such as independent contractors. A special request for coverage for this type of worker would have to be made and the policy endorsed accordingly.There is also no coverage for the owners or partners of the business. In businesses where there are several partners involved, such as law firms or accounting firms, special endorsements are available that are designed to provide partners coverage, but they must be specifically requested.When choosing a coverage limit, it is important to understand that it will apply on a “per loss” basis. Multiple acts of dishonesty by one or more employees, even if they occur over the course of several years, are considered to be one loss.Most insurance carriers are writing employee dishonesty coverage using the new Simplified Crime policy or their own specialized forms which encompass several different coverages. Using the Simplified Crime form, an employer can combine several coverages, such as employee dishonesty; forgery or alteration; theft, disappearance and destruction of money and securities; and computer fraud on one policy.While no employer can totally eliminate the risks associated with employee dishonesty, by maintaining the proper insurance and a good loss prevention program, the risks can be minimized and the chances for serious financial damage greatly reduced.