By Roy C. McCormick
The oncoming holidays and the "clearance" days that follow provide a timely reminder to review the crime exposures and coverages of retailers, in particular, and other businesses, professions and institutions, in general. Such continuing care mid-term will not go unnoticed by insureds, too many of whom are accustomed to hearing from their insurance providers only for renewal purposes. It is a good time to provide counseling.
The concern is with two distinct exposures and the mutually exclusive, non-overlapping coverages available for each. One is theft by outsiders and the other is employee dishonesty. There is, unfortunately, a long record of loss situations where business people carried insurance for theft by outsiders or for employee dishonesty, but not for both.
Producers who review existing coverage provided for robbery, burglary, and/or theft of money and business personal property by outsiders should take into account the potential at and away from the premises. Are the limits adequate? Are the forms used proper for the exposure?
Especially when the forms used are not truly comprehensive, time would be well spent in making clear to the insured whether or not money is covered and what is meant by "robbery," by "burglary" and by "theft." Some insureds will want to upgrade their protection when they become aware of its limitations.
"Robbery" means the taking of property by violence or threat of violence. "Theft" is a broader concept, meaning the wrongful taking of the property of another, including by violence. "Burglary" involves theft by forcible and illegal entry, evidenced by visible signs made by tools, explosives, electricity or chemicals. By pointing out these distinctions to insureds and emphasizing the scope and limitations of coverage, producers can avoid misunderstandings.
Internal theft by employees in a variety of positions is a major problem for management and law enforcement authorities. Mushrooming personal problems, sometimes combined with a feeling of "not being paid what I am worth," trigger criminal acts by people who never would be suspected of having such inclinations.
The Fidelity and Deposit Company, specialist in crime insurance and a major bonding underwriter, compiled a listing of embezzlement case histories involving business firms of all kinds and employees holding a wide variety of positions.
Recorded embezzlements involving company officers, managers, bookkeepers, cashiers, sales people, shipping and receiving clerks, warehouse workers, truck drivers, porters and others demonstrate the risk of carrying insufficient amounts of employee dishonesty insurance. They also make clear that no business is immune from embezzlement.
The Surety Association of America found, after a study of management's exposure to employee dishonesty and a review of losses over an extended period, that insureds did not carry employee dishonesty insurance in amounts large enough to cover the loss in a majority of actual losses studied. In light of this, the association developed a formula that has been widely used to replace guesswork in arriving at sufficient amounts of employee dishonesty insurance for individual insureds.
This simple and practical formula employs an exposure index that utilizes the two principal elements of exposure to dishonesty losses: current assets and gross sales or income. The formula is available through insurance companies. Employee dishonesty insurance should not be renewed for previous limits without careful review. Just as property insurance limits should be increased in the face of rising building costs and higher price tags on goods, so should fidelity insurance in many instances.
Proof of the circumstances surrounding the taking of business personal property has always been a condition of coverage under the various forms of crime insurance carried by businesses. Facts determine which coverage applies, and there must be proof. Claim would be made under coverage for outsider theft or under the coverage for employee dishonesty.
Insureds take a positive step by carrying both theft coverage and employee dishonesty coverage. It is advisable, obviously, that both coverages be written by the same insurer, whenever practical. This minimizes the possibility of a dispute between companies over the application of their respective policies. The situation is comparable to the recommendation that general liability and workers compensation insurance be written by the same company, the best guarantee of protection when, for example, an employee is injured on the insured's premises or job site when he or she has returned for personal reasons after work.
The National Retail Federation found that, over several years, there had been a slight decline in the percentage of crime losses attributed to shoplifting and an increase in those committed by employees. Well-managed stores have developed and put into use sophisticated theft prevention devices, actions which can be credited with deterring outside theft, although the problem is still enormous. It is hoped that technological advances, such as the programming of computerized cash registers to detect unusual activity, will serve to forestall in-house crime, or detect it in its early stages.
The American Management Association has estimated that employee dishonesty causes as much as 20% of the nation's business failures. Small businesses are especially vulnerable and need the backup of sound insurance. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.
©COPYRIGHT: The Rough Notes Magazine, 1997