Do you have the insurance coverage to reimburse you the funds that your employee has stolen from you? Unfortunately, our Agency has seen an alarming number of employee dishonesty (crime) claims amongst our insured’s. Feel free to contact me to learn more about this coverage or call your agent that represents your company to discuss this important coverage.
Jennifer Moffitt, CIC, CWCA
By Nancy S. Flury, Lindquist & Vennum P.L.L.P.
Fraud and embezzlement in the workplace is on the rise. Since restitution by the employee is usually impossible because the money has been spent, a Fidelity Bond may be your only safeguard to absorb the loss along with taking some preventive steps to discourage your employees from committing an act of dishonesty.
What is a Fidelity Bond?
Crime-related losses are not typically covered by most property insurance policies. General liability and professional liability policies may cover defense costs arising from an employee mistake or negligence, but fraudulent and dishonest acts are usually excluded.
A Fidelity Bond, also known as an Employee Dishonesty Bond, provides coverage for dishonest and fraudulent acts of employees that arise in the course of handling money or securities of others. This crime protection insurance can cover employee theft, money and securities while on the premises or in transit, forgery, funds transfer fraud, computer fraud, money order and counterfeit currency fraud, credit card fraud, optional client coverage, coverage for investigative costs for covered losses, and it responds to federal law bonding requirements of employee benefits.
Some of the Pitfalls of Coverage.
Fidelity Bonds can cover individuals, businesses and associations for money or other property lost because of dishonest acts. Similar to Employers Practices Liability Insurance (EPLI), the nature and scope of the coverage and defense can vary from policy to policy.1
Underwriters carefully screen the applications. All applications should be carefully reviewed to ensure accuracy and avoid future claim denial. Complete and actual issuance of the Fidelity Bond must occur to put coverage in place.
Defining Who Is An Employee.
Providers of Fidelity Bonds will ask detailed questions about the employees you expect to cover under the bond and the positions they hold. You want to make sure that the bond includes a broad definition of employee, including directors and officers (compensated and non-compensated), part-time and full-time employees, leased, temporary and seasonal employees and volunteers. Employees covered by the bond may also be identified in the language of the bond either by name or by position. Some classifications of employees may be so adverse insurance companies require deductibles or exclude them entirely from coverage.
Watch Out for Termination Provisions Based on Discovery of Dishonesty or Past Felony Convictions.
Fidelity Bonds may exclude coverage for an employee or potential employee once you know that the employee has been convicted of a felony. Even if you do not have knowledge of a felony conviction, once you have knowledge of a dishonest or fraudulent act, the bond may terminate immediately. Make sure that the bond termination provisions regarding discovery of dishonesty or fraudulent acts are narrowly defined to include only risk managers and senior management. Otherwise once any supervisor or manager learns of the dishonest or fraudulent act and they are not in collusion with the employee, your bond coverage may terminate. Make sure your supervisors and management personnel understand, though, that when they become aware of a past felony conviction or a dishonest or fraudulent act in the workplace, they need to immediately notify your risk management officers because it could affect coverage.
What Kind of Limits Do You Need?
Fidelity Bond coverage is mandatory if your business offers employee benefit plans. Title 1 of the Employment Retirement Income Security Act (ERISA) of 1974 requires fidelity bonding of all fiduciaries administering employee benefit plans. ERISA stipulates that the amount of the bond be fixed at the beginning of each fiscal year of the plan. The limit should not be less than 10 percent of the total amount of funds handled, subject to a minimum of $1,000 and a maximum required of $500,000.
The fiduciary liability coverage required by ERISA only covers wrongful acts because of the service as a fiduciary related to the employee benefits plan. You want to make sure that you have coverage to sustain a loss of funds as a result of conduct by any of your employees, not just those involved in administering employee benefits. The Association of Certified Fraud Examiners (ACFE) estimated that in 2002 the average business lost 6 percent of its total annual revenue from losses involving employees. This statistic comes from the ACFE 2002 Report to the Nation. The ACFE also reported that frauds committed by employees caused median losses of $60,000, while frauds committed by managers or executives caused median losses of $250,000. When managers and employees conspire in a fraud scheme, the median loss rises to $500,000.
An Ounce of Prevention is Worth a Pound of Cure. It’s better not to get hit.
Most employers are shocked when they learn of employee dishonesty and fraud in their work place because it adds up to so much and went undetected for such a long period of time. Trusted employees of many years seniority that occupy important positions in the business are also often involved. Employers are amazed that their bookkeeping or financial audits did not catch the fraud.
Internal audits, external audits, and background checks can significantly reduce fraud losses.
(1) Review Personnel Forms and Procedures. Make sure your employment application forms ask whether the applicant has ever been convicted of a felony. Include the question in your interview of the applicant. In addition, you should perform thorough background checks on all of your employees. This does not mean that you can decide not to hire an employee solely on the basis of an employee’s past felony conviction or other crimes. The Equal Employment Opportunity Commission guidelines prohibit making decisions on hiring solely on the basis of a conviction of a crime. Some state human rights law may also prohibit an employer from making a decision not to hire solely on the basis of a conviction. Consult your legal counsel for more information.
(2) Initiate Internal Controls. Individuals with single check signing authority may not be eligible for coverage under the bond. If this is your current system, you need to address that coverage issue with your insurer. In addition, you should set up a system with multiple personnel involved. For example, you should not have the individual who generates the check and obtains the signature on the check also be responsible for sending the check.
(3) Create a Fraud Abuse Hotline. The ACFE found that organizations with fraud hotlines cut their fraud losses by approximately 50% per scheme.
Taking these preventive measures should help minimize the chances of your company suffering a loss from employee fraud or other acts of dishonesty.
1 See the July 2003 riskVue article by my colleague, Daniel J. Sheran, “EPLI: Worth Another Look.”