Employee Dishonesty Coverage – What Does It Cover?
Today I’m going to kick off a series on commercial crime insurance and specifically talk about employee dishonesty coverage.
In this series, I’ll cover what crime insurance is
Why it’s needed by many types of businesses,
How coverage gaps often occur and how to avoid them.
Okay, commercial crime insurance – this is a coverage that’s often misunderstood by clients and by insurance agents, so let’s start with
What Does Commercial Crime Insurance Cover?
As a stand-alone policy, the commercial crime coverage form typically contains 8 to 10 coverage parts covering specific crime perils.
There are different forms used in the financial services industry such as for banks, hedge funds, and private equity firms; and then there are other policies and enhancements and unique endorsements used for special situations.
Generally speaking, crime insurance focuses on protecting your company’s money, securities, and other negotiable financial instruments.
Now before I get into the specifics of employee dishonesty I want to take a step back and say that some crime coverages including employee dishonesty can be found in most business owners or BOP policies.
The BOP policy is geared for small to medium-sized businesses and combines property and liability plus many other fringe coverages such as employee dishonesty into one package policy.
It’s important to know the limits of employee dishonesty or employee theft – the terms dishonesty and theft are used interchangeably – vary from policy to policy
Even from the same insurance company through the application of different broadening endorsements.
In my experience, most BOP policies will provide employee dishonesty limits of $10,000 to $50,000 depending on the insurer and applied endorsements.
In some situations, this may be sufficient.
But what many business owners don’t consider, especially with regard to employee dishonesty is the cumulative potential claim that can occur.
What I mean by that is that an employer may think, “I would know if someone embezzled $25,000 from my company….red flags would be popping up all over the place.”
While that may be true, most employees intent on embezzling funds from an employer don’t try and write a big check and hope to get away with it.
Instead, the scheme is to embezzle small amounts of money through various means every month or week over years.
It may start with $10 here and there and escalate up to $100 and then $1,000 as a rogue employee becomes bolder and bolder.
Like I said $100 missing from the till is no big deal, but if it’s done repeatedly over time and increases these types of claims reach into the millions.
The point I want to make is that say your BOP policy provides a limit of $25,000 for employee theft and you discover that over the last 5 years $400,000 or more has been embezzled a little at a time.
You’re really going to have a problem- in this case, $375,000 of an uncovered claim! That’s a serious shortfall.
Now you may be thinking, how can an employee embezzle that sort of money without someone noticing g it?
The answer is that rogue employees will find weaknesses in your systems and exploit them. It’s not always as simple as pilfering cash or checks from the company.
Employee theft claims can be complex and involve the illegal transfer of funds, paying fraudulent invoices, maintaining two sets of books, and more.
Employers most at risk are those with poor controls, part-time employees, businesses that accept cash, those with high-value inventory goods, and those with inventory in transit.
The bottom line is that employers need to be vigilant, have bulletproof systems in place to manage and monitor this risk, and purchase an appropriate level of employee dishonesty insurance.
Now to wrap up a few more points.
What’s not covered by Employee Dishonesty coverage?
When money is stolen by company executives and partners it’s going to be excluded. There are carve backs to include this but you’ll pay extra for it.
When an employee steals money from your customers that’s in your custody or control, that’s also not covered.
But you can purchase something known as third-party fidelity coverage.
Often firms working for large financial institutions will often be required by contract to purchase third-party fidelity –
even if they never have access to that institution’s money.
What does Employee Dishonesty Insurance Cost?
That’s a good question and the answer is based on several factors, including:
- The type of business you’re in.
- the number of employees you have.
- the number of employees who have money-handling responsibilities.
- Your total revenue,
- The security controls and financial audit processes you have in place for money handling,
- and of course the limit of coverage you purchase.
To find out exactly what employee dishonesty and crime insurance would cost a short application is generally required.
We then take that application and go out to the marketplace to find you the right underwriter who can provide us with the broadest protection and the lowest cost.
Have other questions regarding crime insurance or employee dishonesty coverage?
Give me a call, or drop me an email.
I promise – no hardcore selling,
Just some conversation to answer your questions and see if we’d be a good fit for you and your company.
Thanks!
