EMPLOYEE DISHONESTY INSURANCE
Many employers do not realize how vulnerable they are to
financial loss caused by the fraudulent acts of their employees.
A common response from an employer is, "My employees are like
family, they would never steal from me," or, "My business
isn't the type where employees steal anything." How wrong
they are!
Every year, millions of dollars are lost due to employee
dishonesty. Many businesses suffer severe financial damage
and, in a number of cases, even end up in bankruptcy. It's
not uncommon when reading the paper to see articles about
the long-time, trusted employee who has been siphoning money
out of the employer's business for years. While some acts
are one-time thefts, most large losses are caused by long-term,
ongoing schemes that are cleverly hidden for years.
What can employers do to protect themselves from this
risk? There are two steps that should be taken. The first
step is to establish a loss prevention program. The second
step is to obtain employee dishonesty insurance.
A loss prevention program for employee dishonesty involves
many factors. It's important to understand the causes behind
most claims in order to help prevent them. Three areas have
been proven to be key factors: opportunity, financial or emotional
pressure, and employee attitude.
- Opportunity -- Even the most honest employee can
be tempted to steal if proper controls are not in place
and if given the opportunity.
- Pressure -- Economic pressures caused by such things
as drug or alcohol dependency, gambling problems, divorce,
and serious illness can create a situation where an employee
becomes desperate enough to steal.
- Attitude -- An employee who feels they have been
treated unfairly may think that the company owes them something
and they have a right to take it. This often occurs when
someone doesn't get the raise or promotion they feel they
deserve or when the company starts layoffs and they think
they are going to lose their job.
The following steps can be taken to monitor and control these
situations:
- Institute an internal audit system for all financial records.
- Have an independent accountant perform a full audit annually.
- Make sure that bank accounts are reconciled by someone
other than those who handle deposits and withdrawals.
- Have countersignature procedures for checks.
- Make sure there is joint handling of any securities.
- Have strict security procedures for all computer operations.
- Institute formal management procedures.
- Institute a formal employment policy for hiring new employees.
In addition to implementing a loss prevention program, an
employer needs to purchase employee dishonesty insurance to
provide coverage for any losses that do occur.
Employee dishonesty insurance protects the employer from
financial loss due to the fraudulent activities of an employee
or group of employees. For a loss to be covered, the employer
must suffer financial loss and the employee must either obtain
financial benefit from the act or direct financial benefit
to another person or organization. The loss can be the result
of the employee's theft of money, securities, or other property
of the insured. Most employee dishonesty insurance policies
are written on a blanket basis so that all employees are covered.
There are some restrictions to the coverage that are important
to know. The definition of employee in most policies is limited
to persons in the employer's service that are compensated
directly by salary or commissions and who the employer has
the right to direct and control while performing their duties.
This does not include people such as independent contractors.
A special request for coverage for this type of worker would
have to be made and the policy endorsed accordingly.
There is also no coverage for the owners or partners of
the business. In businesses where there are several partners
involved, such as law firms or accounting firms, special endorsements
are available that are designed to provide partners coverage,
but they must be specifically requested.
When choosing a coverage limit, it is important to understand
that it will apply on a "per loss" basis. Multiple acts of
dishonesty by one or more employees, even if they occur over
the course of several years, are considered to be one loss.
Most insurance carriers are writing employee dishonesty
coverage using the new Simplified Crime policy or their own
specialized forms which encompass several different coverages.
Using the Simplified Crime form, an employer can combine several
coverages, such as employee dishonesty; forgery or alteration;
theft, disappearance and destruction of money and securities;
and computer fraud on one policy.
While no employer can totally eliminate the risks associated
with employee dishonesty, by maintaining the proper insurance
and a good loss prevention program, the risks can be minimized
and the chances for serious financial damage greatly reduced.
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