Criminal Intent vs. Prudent Protection
Many employers assume their property insurance covers crime-related losses. Typically, crime is not included in most property policies. Even those businesses that buy crime coverage rarely purchase enough protection. Most business insurance policies either exclude or provide only nominal amounts of coverage for loss of money and securities as well as employee dishonesty exposures.
It’s not just the number of crime shows on television that is on the rise. The Association of Certified Fraud Examiners (ACFE) states that U.S. businesses lose $600 billion a year to fraud and abuse. The American Management Association attributes 20 percent of the nation’s business failures to employee dishonesty. Small businesses are especially vulnerable — losing 20 percent more than larger corporations.
The ACFE estimates American businesses average a 6 percent loss in revenue per year because of employee fraud. That translates to an average loss of $4,500 for each employee per year.
Areas of Exposure, Types of Coverage
Commercial crime insurance — sometimes called fidelity insurance — protects businesses from criminal loss of money, securities, or inventory. Liabilities covered usually are grouped into two classes of coverage:
- Money and Securities — covers these items taken by theft, robbery, burglary, disappearance, and destruction on or off the premises.
- Employee Dishonesty — covers losses from dishonest acts of employees, including fraud and embezzlement.
These categories are general, and the definitions do not begin to cover all the exposure that exists in a high-tech
global economy. While there is still “good old-fashioned” burglary and property
theft, some of the additional areas where protection is needed and amendments suggested include:
- Computer fraud
- Credit card fraud
- Forgery
- Counterfeit currency
- Cash register coverage
- Selling price protection
- Fraudulent loans
- Unauthorized funds transfer
- Extortion
- Worldwide coverage
Profiling the Perpetrator
Although crime may strike from inside or outside the company, approximately 80 percent of workplace crime is committed by employees. A study by Ernst & Young, LLP, concluded “...over a five-year period, two out of five businesses suffered more than five instances of fraud, and one in four had lost at least $1 million as a result of fraud.”
The internal perpetrator isn’t always the standard suspect. The Treadway Commission conducted a decade-long study of fraud that led to the executive suite 83 percent of the time. Other studies have resulted in a “profile” of potentially criminal employees. The findings show 25 percent of employees committing fraud have been on their company’s payroll more than 10 years. They are frequently trusted staff members whose loyalty is unquestioned — and who are, therefore, placed in positions of temptation to commit crime.
Major insurance carriers report that perpetrators are often disgruntled employees whose crimes may be motivated by the desire to strike out against the employer. Greed, financial need, and access to money or money management also contribute to workplace crime.
Add-On or Stand-Alone
Employee dishonesty insurance can be added on to business owner’s policies. Some insurance advisors suggest good reasons for stand-alone crime insurance rather than added endorsements. Their reasons include the possibilities that added-on crime coverage may:
- Protect only the first party
- Impact the business policy with dishonesty claims
- Limit coverage to insufficient levels
- Exclude important areas of exposure
Appropriate, adequate separate coverage for crime-related losses enables companies to withstand the financial impact of illegal actions that strike from without or within and by low-tech or high-tech means.
Prevention Advice
No business is immune to crime. Even the best-run operations are subject to possible loss.
Preventive measures that insurance carriers recommend include a company climate that emphasizes integrity, practices internal checks and balances, and operates with established policies and procedures. The best preventive measures begin before hiring. Background checks on applicants should help filter out potential problems. Reducing temptation may mean monitoring cash onsite, checking receipts, and stamping checks “for deposit only.” Security cameras, perimeter surveillance, locked doors, and well-lit facilities and grounds are business investments that pay off in crime reduction.
First and foremost, talk to your insurance broker about crime insurance. Be sure to ask about:
- Appropriate limits
- Blanket or specific coverage
- Stand-alone or add-on
- Period of coverage
- Proving losses
- Preventive measures
- Third-party coverage
- Exclusions and endorsements