What Is Employee Dishonesty Coverage?

September 28th, 2020

Did you know that the median loss per case of employee fraud is $125,000? Or that a typical fraud case lasts 14 months before detection and causes an average loss of $8,300 per month?

No business owner wants to think their staff could embezzle from them, but they must realize they aren’t immune. In fact, nearly 5% of global revenue is lost to fraud, with operations, accounting, upper management, and sales departments responsible for more than half of all fraud schemes.

There is an insurance policy to help guard your business against this, though: Employee Dishonesty Coverage.

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It’s generally part of a crime insurance policy, but is sometimes included as an add-on to your Business Owners Policy (BOP) or Commercial Package Policy (CPP).

This coverage pays for loss of or damage to money, securities, and other property resulting directly from theft committed by an employee, whether identified or not.

This coverage is designed to protect your balance sheet from employee fraud schemes.

Employee Dishonesty Coverage Cost

The cost of employee dishonesty largely depends on the limits that you have and the opportunities that an employee has to defraud your organization.

If you are a small business, you can usually purchase a small limit of $25,000-$50,000 for an extra $200-$650. You can do this through a property enhancement endorsement that requires little to no underwriting.

If you are a larger business or want higher limits, you can purchase a crime policy with more customized limits and broader coverage. It is not uncommon to need limits of over $1,000,000.

If you go this route, the underwriters will ask you what processes and systems you have in place to prevent fraud. The more satisfactory your answers, the lower the price you will receive on your quote.

Employee Dishonesty Coverage Exclusions

Although this coverage is pretty broad, there are some exclusions that you should be aware of:

1)  Volunteers are not covered by default.

Under the standard crime insurance policy, volunteers are not included as covered employees. This particularly impacts nonprofits, churches, and governmental organizations, since volunteers are often writing checks and managing funds.

If you are involved in any of these organizations, make sure that you add the endorsement "Include Volunteer Workers As Employees - CR 25 09" or an equivalent. This adds volunteers as covered employees, and if they ever steal money from the organization, you have a path to reimbursement.

2)  If you know your employees have been dishonest before, they won’t be covered.

If you have an employee that has stolen from your business (or a previous job) and you are aware of it, they are no longer a covered employee under the employee dishonesty insurance policy.

If you know that an employee stole from you or a previous employer – and then forgive them and allow them to work for you – they become a risk you take alone. The insurance company will not share the risk with you.

3)  You must alert the authorities.

Certain employee dishonesty policies require you to bring charges against the employee – as well as cooperate in the subsequent investigation – to get reimbursed from fraud damages.

This is hard for many nonprofits and businesses that want to give the employee a second chance and not turn them in to the police. If you give a stealing employee another shot, you forego the opportunity to get reimbursed for the loss of money. In addition, the employee dishonesty policy will not cover that employee in the future.

Employee Dishonesty Claim Examples

Employee fraud schemes can come in a nearly infinite amount of forms, with asset misappropriation being the most common and least costly, and financial statement fraud being the least common and most costly.

Here are a couple examples of employee fraud:

Using Fictitious Contractors: If you own a commercial building (or multiple buildings), chances are someone is in charge of hiring contractors to maintain the structure(s).

We commonly see the creation of a fake contractor to make repairs to the building and invoice the company. This person in charge of hiring contractors then pays the fake contractor for work that was never done. The contractor is usually an LLC set up by the fraudulent employee as a way to funnel money into their own account.

Using Company Credit Cards For Personal Expenses: Running a company often requires trusting employees with company credit cards.

Sometimes employees take liberties on credit card purchases, such as paying off their personal expenses or covering their own gas, grocery shopping, auto repair, and so on.

Summary

No business is immune to employee dishonesty or fraud. It is important to have proper controls in place and have the proper insurance protection to reimburse you for any damage that a fraud scheme could cause to your business.

There are multiple different ways to get this coverage, depending on the scope of the policy that you need. Let us know if you need help deciding which direction to take; we’d be happy to discuss the most beneficial policy for your business.

About The Author: Austin Landes, CIC

Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.

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