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Coverage Concerns Employee theft insurance Potential for repeated acts and collusion calls for sufficient limits By Roy C. McCormick
In light of the increase in the number of criminal acts that are committed by workplace employees, insurance providers should stress the need for employee theft insurance with appropriate limits. One major factor that possibly can contribute to this increase is out-of-control credit card debt. Business and government studies and reports show that large numbers of people use up the maximum credit provided by one charge card and then make similar use of another. Growing balances, an accumulation of interest at high rates, and required monthly payments cause many to exceed their ability to meet obligations and fixed expenses. In addition to credit card debt, some people must contend with a jump in the amount of premium they contribute for the group health insurance provided by their employers. Corporations also are limiting pension plans to the current level for present employees. They will receive pensions at that level upon retirement, but the arrangement will not be available to new employees. However, present and new employees are offered attractive 401(k) plans. Some employees perceive these restrictions and changes as the breaking of an employer’s word and further see them as contributing to their financial hardship. These thoughts, combined with overspending by many people, can fuel a climate conducive to internal theft by some employees. Our focus is on the manipulation of money and accounting in particular and also property taken by employees, as distinguished from theft by outsiders. Sometimes the losses are the result of two or more employees working in collusion, as in the theft of warehouse inventory, for example, over a period of time. Studies reveal that shoplifting has decreased and employee theft has increased since the early 1990s. Security measures utilizing modern technology have reduced theft by outsiders. Recorded embezzlements involving employees at all levels—company officers, managers, bookkeepers, cashiers, salespeople, shipping and receiving clerks, warehouse workers, truck drivers, porters—demonstrate the need for employee theft insurance. They also make clear that no business, large or small, is immune from embezzlement. The potential for employee embezzlement can be minimized by paying attention to credit and debit card sales and receipts, supply and equipment purchase records, and by the auditing of books by a capable accountant. Relatively new loss prevention measures include background checks on applicants for sensitive positions by employee database services, and the installation of security cameras connected to cash register monitoring systems. The latter is increasingly used by larger firms. A Surety Association of America study of employee dishonesty losses over an extended period found that insureds did not carry employee theft (dishonesty) insurance in amounts large enough to cover the loss in a majority of actual losses. Employee theft 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 personal property, so should fidelity insurance in many instances. Media reports regarding employee dishonesty can provide convincing evidence of the need for sound coverage. Local incidents have the impact of demonstrating that they happen close to home; those occurring elsewhere indicate the widespread nature of the problem. Employee dishonesty coverage written for large and medium-sized businesses is customarily geared to the exposure. It takes into account current assets and gross sales and income, utilized in a widely used formula developed by the Surety Association of America and available through insurance companies. Small accounts should carry limits above a bare minimum and should be selected by the insured, based on the awareness of exposures and premium considerations. Limits for large accounts must also be chosen by the insured. The employee theft insuring agreement in current commercial crime forms drafted by the Insurance Services Office (ISO) applies the limit of insurance to the total loss over time for related acts committed by one or more employees or several acting in collusion. The limit applies to each act, not each employee. Courts have confirmed this. Employee theft under the widely written businessowners policy closely resembles that in commercial crime programs. However, it is a “built-in” option, not provided by endorsement but activated in the policy declarations and fixing the limits. Agents and brokers can perform a needed service by calling attention to the numerous occurrences of employee theft and by stressing the importance of proper insurance for this risk. * The author |
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