If your company experiences a loss of money, securities or assets as the result of a crime, you may think your insurance will cover the loss.
But claims for this type of loss, called a fidelity loss, are usually excluded under other policies you purchase.
“Usually, the loss results from an employee or someone in a position of trust that is responsible for the property or money being lost,” says Scott Nuelle, vice president of ECBM Insurance Brokers and Consultants. “And if you don’t have the right insurance, such a claim could threaten your business.”
Smart Business spoke with Nuelle about how fidelity losses can affect your company and how to protect yourself.
Why do companies need to be aware of fidelity losses?
Companies usually assume they have coverage somewhere for fidelity losses, and they may not realize that they don’t. Properties policies do not cover money or securities. They also exclude coverage for theft by an employee, regardless of what the employee steals.
Many believe they don’t need the coverage because their business isn’t that big and they feel they know the people who work for them. Most larger companies understand the exposure but don’t always purchase enough limits.
How do you protect yourself against fidelity losses?
Companies should set up internal controls, as well as audit procedures. These internal controls should monitor who has access to money, checks, money orders and property. You need checks and balances built in so that one person, particularly a trusted adviser, cannot do anything without at least one other person in a position of responsibility signing off on it.
Additionally, companies should consider purchasing insurance coverage, the most common of which is a crime policy. There are industry-standard forms, but the form and coverage will vary in each individual insurance policy. These coverage forms include employee theft, forgery or alteration coverage, theft, disappearance and destruction coverage for both inside and outside the premises, computer fraud and wire transfer fraud.
Why should employers consider additional endorsements beyond their basic coverage?
A lot of the package policies people buy will have some limited crime coverage. Employers can look at it and say, ‘I have coverage,’ but the sublimits are usually pretty small. It provides minor protection against what is usually a pretty large exposure.
Even though you have coverage, if you don’t have it set up correctly with the right endorsements, you could end up in a position where you don’t have what you think you have.
Also, many companies assume that their internal controls are sufficient to ward against employee theft. But people who are motivated will find ways around internal controls, and employee theft could occur in small amounts over a period of months, or even years. When you realize that the ongoing theft by one employee becomes one occurrence, it becomes easier to understand that the loss could grow to a very large number. If one employee steals either money or property every week over a period of years, the loss could easily get into six or seven figures. There has been an uptick in these claims over the last few years and they are big losses.
What are some trouble areas where companies’ coverage may be lacking?
The standard definition of ‘employee’ in the coverage does not include subcontractors or independent contractors acting as employees. You need to rely on your broker to add that endorsement to include independent contractors as employees.
Another area where we have seen an increase is in theft of wire transfers made through your bank. There are hackers that will intercept wire transfers and redirect the money to offshore accounts. This area of theft is still emerging, and the banks may not take responsibility for all of the loss after the transaction is completed. Unless you have computer fraud coverage and wire transfer fraud as part of your coverage, you may have no recourse and no way to recoup that money.
Another recommended endorsement provides coverage for claims expenses, because when you have one of these claims, the easy part is proving that you’ve had a loss. However, you don’t recoup anything for that loss unless you can quantify it, which requires hiring investigators and forensic accountants to prove the amount of the loss. The expenses associated with hiring these types of experts and with proving your loss can be substantial.
The ERISA endorsement is another common enhancement. If you have employee benefit plans, such as 401(k) plans, you have to post bond with ERISA. Rather than posting a separate bond, you can get an ERISA endorsement added to crime coverage, which satisfies the government’s bond requirement.
How can companies ensure that they are protected from fidelity losses?
The key is having a broker who knows how to structure the coverage based on your operation at the most competitive price. Just as important, you need to deal with a broker who can put a claim together and advise you once you have a claim.
These types of claims are not like car accidents, where you can show your damaged vehicle and get it fixed. You have to know how to put the claim together, and you need to know which forensic accountants and investigators to use.
The insurance company has its own experts. It is important to have a broker who will be an advocate for you in this complicated process.
Scott Nuelle is vice president of ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or [email protected].
