Employee Dishonesty: How to protect your business?

No one ever wants to believe that employee theft can occur in their company. It is hard for them to imagine that this could happen to them.

Unfortunately, it does, and fraud and embezzlement in the workplace are on the rise in a serious way. The Association of Certified Fraud Examiners (ACFE) estimates business losses can range from hundreds of thousands to millions of dollars each year.

Some estimates put the annual costs to businesses in the United States around $400 billion. More specifically, a typical business might lose up to 6 percent of its revenue due to fraud each year.

Smaller firms may suffer greater damages from fraud and embezzlement because of inadequate safeguards (controls) and the inability to absorb losses. This chain of events can directly contribute to small businesses ending up in bankruptcy.

It is believed that 80 percent of workplace crime is carried out by employees, and that many of those employees have been with the firm for more than 10 years. With numbers like those, Employee Dishonesty Insurance could be the very thing that helps protect and sustain the business in the future.

Unfortunately, with the proliferation of new technologies that help all of us work faster and smarter, all businesses are susceptible to employee theft and fraud.

Even with employers taking precautions before hiring employees, using backgrounds checks and other methods to secure information about the employee, there is no way to completely eliminate fraud or embezzlement by employees.

In employee-dishonesty schemes, employees can take advantage of potential weakness in your company’s financial controls. Some of the more common schemes involve but are not limited to fictitious employees, dummy accounts payable, and nonexistent suppliers to outright theft of money, securities, and property.

Liabilities covered by crime insurance normally fall into two main categories, although it is very common for insurance firms to combine both types of coverage:

Money and Security Coverage

• pays for money and securities taken by burglary, robbery, theft, disappearance, and destruction

Employee Dishonesty Coverage

• pays for losses caused by most dishonest acts of your employees, such as embezzlement and theft

So how does Employee Dishonesty Insurance work? Because crime-related losses are not typically covered by most property insurance policies, crime protection insurance should be a necessary part of a business’s comprehensive insurance program.

Don’t make the mistake of thinking that your standard business owner’s policy will provide you with full protection against employee theft and dishonesty. Unfortunately, not all employee-dishonesty policies are the same, and some offer broader coverage than others.

There are three ways an employee-dishonesty policy can be written. The first is on a commercial blanket basis. The total amount of the bond applies to any one loss, regardless of the number of employees involved in the loss; there is no specific amount that applies to any single person.

The second is a blanket position and coverage; this type of bond applies separately to each identifiable employee.

The third form of coverage involves a name-schedule bond or the position-schedule bond. Name-schedule bonds cover a particular named person, and scheduled-position bonds cover any occupant or holder of one or more specified positions.

The name-schedule bond combines several individuals. Covered persons must be listed, including the coverage amount applying to each person. New employees may be added and former employees deleted at any time, but all covered employees must be listed.

There are substantial advantages to using a blanket policy for employee dishonesty. Under the blanket format, all employees are covered under blanket forms. This eliminates “surprises” if a loss is caused by an employee not thought of as in a position to steal or of a mind to steal.

Also, blanket forms provide automatic coverage for new employees without notice to the company. Blanket forms also do not require premium adjustments during the year.

It is very important to look at your business and determine the potential for exposure in certain areas. Employee-dishonesty insurance is no different from any other type of commercial insurance that a business might utilize.

The limits will change based upon the type of coverage that you elect to use. Limits usually start at $100,000 and go much higher.

Most insurance providers offer stand-alone, add-on, or endorsement employee-dishonesty coverage for a business. Often, add-on policies do not have sufficient coverage limits and are limited to first-party coverage only. Stand-alone policies are often needed for those with more extensive exposures.

It is customary for employee-dishonesty policies to exclude coverage for accounting or math errors or omissions, vandalism, government seizure or destruction of business property, restatement of a profit-and-loss statement, theft by a policyholder, and loss of income related to a covered employee crime.

It is highly recommended that businesses incorporate employee-dishonesty insurance in the comprehensive plan for protecting assets. No matter how successful your business might be today, it is a good idea to plan for the worst and expect the best. BW