How the right insurance policy can protect you in the event of fraud Featured

9:01pm EDT May 31, 2012
How the right insurance policy can protect you in the event of fraud

You may think that your employees would never steal from you, but how well do you really know and trust the people who work for you? One-third of all employees steal from their employers, and it is estimated that the average loss for an act of employee fraud is in excess of $175,000, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group.

“Even the best internal controls can fall short of preventing an employee from committing a dishonest act if he or she is determined to do so,” says McTeague.

Employee crime and theft have dramatically reshaped business in corporate America.  For example, on Sept. 9, 2011, Carla Jean Johnson was sentenced to 120 months in federal prison for her conviction of wire fraud that cost her employer $977,418. Columbia Lloyds Insurance Co. paid the company’s claim to cover the controller’s embezzlement.

Smart Business spoke with McTeague about why it’s worth investing $5,000 in premiums to protect your assets and ensure employee fraud doesn’t put you out of business.

What constitutes employee theft, and what company assets are most at risk?

Employee theft can be classified into two major categories: theft of property and misappropriation of funds. Theft of property can include office supplies, inventory, work in process or scrap that belongs to the company. Misappropriation of funds can include the use of accounting records to disguise or redirect accounts receivable, misuse of credit cards, payroll fraud, outside businesses paying kickbacks or other unauthorized transactions.

What protections do general insurance policies offer companies against employee theft?

A standard ISO property policy will pay for a nonemployee stealing from your organization, but what if it is internal? A majority of today’s insurance carriers offer a crime policy to cover business assets that are stolen by an employee.  When purchasing a policy, keep in mind how the policy defines an employee and who is excluded from coverage. Crime causes a greater amount of commercial property losses than any other type of property losses. Current estimates are as high as $50 million annually in the United States for employee dishonesty losses alone. Employee dishonesty is just one of many types of commercial crime exposures that you should consider.The fundamental Crime Insurance parts are:

  • Employee theft
  • Forgery or alteration
  • Inside the premises — theft of money and securities; robbery or safe burglary
  • Outside the premises — messenger
  • Computer fraud and funds transfer
  • Money orders and counterfeit paper currency

What types of policies protect employers specifically against employee theft, and how do they differ from general policies?

Commercial crime insurance coverage can be written as a part of your commercial package insurance policy or as a separate standalone policy. The advantage of a stand-alone is that you can customize forms and coverage to meet your business’ specific needs and may be an option if the commercial package insurance company is not in a position to offer you the amount of crime insurance that you need.

There are two policy forms used by carriers to offer employee theft coverage.  Selecting the correct form is important and the forms differ in the premium charged for coverage.

  • Discovery form. The discovery form covers losses that are identified, or discovered, during the policy period, even if the loss happened some time before.
  • Loss sustained form. The loss sustained form will cover only losses that occur during the policy period and up to 12 months after the policy expires. Keep in mind that employee theft can take time to discover. This form could expose you to the risk of financial loss spread over multiple years.

What types of fraud can occur with employee pension or 401(k) plans, and how can they be prevented?

In 1974, the Employee Retirement Incomes Security Act (ERISA) established insurance guidelines to protect the assets of any employer-sponsored pension, profit sharing, or employee welfare plan. ERISA requires that 10 percent of any benefit plan assets be covered by insurance to protect the plan(s) from employee dishonesty. Coverage protects the participants and beneficiaries from dishonest fiduciaries who handle the plan assets.

There are two ways to provide such coverage, either by endorsing the crime policy or purchasing a separate bond through your insurance company. Keep in mind that it is important to regularly review your plan and review the information provided by your administrator.

What procedures can an employer implement to reduce the risk of employee theft?

In a slow economy, businesses have experienced stalled growth, reduced revenue, liquidity concerns and implementing procedures to reduce theft becomes a higher priority as a loss becomes more certain. A business owner should look into implementing loss control procedures to protect the company’s assets. Here are a few examples:

  • Isolate duties — split the job of taking money in and sending it out for deposit. Books kept by one person should be reconciled by another.
  • Require countersignatures on all checks.
  • Perform background checks.
  • Establish a code of conduct.
  • Implement whistleblower programs.

Nearly every business needs to consider purchasing a commercial crime insurance policy, although determining as to what limit can be difficult. Companies should consider the financial impact of an employee theft claim and discuss this with their accountant, attorney and insurance agent.

Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or mmcteague@bhmins.com.

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