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Coverage Concerns Fidelity insurance Increase in employee dishonesty events calls for greater risk management oversight By Roy C. McCormick Money and accounting manipulation is a major component of a growing fidelity problem in large corporations and small businesses alike; the other part of the problem is property theft by employees. Surveys by the U.S. Chamber of Commerce, insurance companies and organizations, universities and other organizations emphasize the severity of the problem, part of which is currently fueled by constant increases in the basic costs of living such as food and medical care. In many cases, wages are not keeping pace with inflation. In October 2006 the U.S. Census Bureau reported that, nationally, people with home mortgages on average spent approximately 21% of their incomes on housing costs in 2005, about 2% more than in 2000. Figures include mortgage payments, insurance, taxes and utilities. These widespread increases in the cost of the necessities of everyday living can become a factor in employee theft. In addition, mushrooming personal problems, possibly combined with a feeling of “not being paid what I am worth,” can trigger criminal acts by people who would never be suspected of having such inclinations. Sound insurance protection and loss prevention measures can protect employers from such instances. This article will focus on employee theft, as distinguished from shoplifting and other theft by outsiders. Data compiled by the National Retail Federation and the Security Research Project at the University of Florida confirm that in the last few years, employee theft has surpassed that caused by shoplifting. The reduction in theft by outsiders is attributed to effective security measures such as surveillance tags on merchandise, beeping checkpoints at doors, strategically placed mirrors of specialized design, special training for employees and the presence of security guards. Types of companies involved Fidelity concerns are not limited to major corporations. Leading providers of crime insurance and bonding have compiled listings of embezzlements experienced by business firms of all sizes. Recorded embezzlements involve company officers, managers, bookkeepers, cashiers, sales people, shipping and receiving clerks, warehouse workers, truck drivers, porters and others. It is clear that no business is immune to embezzlement from a variety of sources. Large companies and employers are generally well versed in fidelity insurance and the need for it. Major insurers provide their representatives with applications and a tested formula utilizing the two principal elements of exposure to dishonesty losses: current assets and gross sales or income. The formula would not be applicable to many small businesses. Although bookkeeping and accounting services used by them are helpful in confirming their need for fidelity insurance, they rely on their insurance providers for guidance. Protection against employee dishonesty requires sound insurance and the addition of new loss prevention techniques to supplement the tested ones that have been used for years. Fidelity coverage language is similar in the coverage parts used by various insurers and in package policies in which it is either included or offered as an option. Insuring agreements and applicable case law make it clear that the limit of insurance must be fixed to cover related collusion losses involving more than one employee over a period of time as well as on a single occasion. The limit also must be sufficient to cover a single employee’s continuous embezzlement scheme, as well as a single act. Those who work with commercial crime coverage forms drafted by the Insurance Services Office, including agents, brokers and insurance company underwriters and adjusters, will want to take note of the significant changes in the 2006 editions of the ISO forms. Reference is made to Form CR 0021 for the changes that apply in all of the ISO forms that provide fidelity insurance. For the most part they clarify “intent” where previously there has been uncertainty and also include some broadening and restricting of coverage, including the following: • It is specifically stated that additional employees and premises acquired during the policy period are automatically covered without additional premium charge. • With respect to employee theft, coverage is broadened by the addition of language to the effect that “theft” includes “forgery.” • Coverage for computer programs and electronic data is excluded under the definition of “other property.” • It is made clear that coverage does not apply to an employee in the current policy period if the insured becomes aware of dishonest acts by the employee prior to the current period. Loss prevention recommendations are part and parcel of the service a professional insurance agent or broker can provide to a commercial insured. Smaller businesses, in particular, need guidance in such matters. Professionals can emphasize the potential for embezzlement by having on hand a collection of newspaper articles that show the variety and frequency of employee dishonesty occurrences. They can then point out that such instances can be minimized by paying attention to cash and credit card sales and receipts, supply and equipment purchase records, and through the auditing of books by a capable accountant. Background checks on prospective employees, provided by employee database services, are a security option for businesses engaged in frequent hiring and those concerned about sensitive positions. Conclusion Fidelity insurance is an essential part of an insurance program for most businesses, those with a limited number of employees as well as large corporations. A single employee’s embezzlement scheme over a period of time can bankrupt a small company without proper protection. Collusion by several employees involving embezzlement of company funds or the taking of property, theft of warehouse inventory in an ongoing scheme over a period of time, for example, can be ruinous. Small businesses are especially vulnerable to the fidelity exposure. Their insurance providers should discuss the problem and provide remedies for it. * The author |
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