Employee dishonesty insurance, also known as crime or fidelity insurance protects an employer from financial loss due to the dishonest acts of an employee.
All organizations with employees are at risk from some form of employee theft. Smaller organizations more frequently suffer from acts of embezzlement. At the same time, smaller organizations can lack the resources to recover from a large financial loss.
Employee theft can happen in the following ways:
- Funds theft, which includes the direct theft of cash or misuse of bank deposits or transfers.
- Check fraud, when an employee alters checks or money orders to divert funds.
- Credit card fraud, which can be the fraudulent use or creation of credit and debit cards.
- Payroll fraud, where employees use the payroll system to divert payroll funds.
- Vendor fraud, where an employee diverts funds by paying fake invoices issued in the names of fictitious companies
Consider the following scenarios, all pulled from local headlines:
“Municipal collections clerk charged with theft of $50,000 in funds from city hall over a two-year period.”
“Employee charged with stealing over $2,000 from employer (a clothing retailer) by creating false refunds to issue gift cards, which he then used for purchases.”
“Former employee charged with embezzling $800,000 in donations from non-profit organization over a period of eight years”
One of the distinguishing features of employee dishonesty losses is that in comparison to a fire or other sudden, accidental loss they can happen over long periods of time and go unnoticed even after the perpetrator has ceased to be an employee. In the first example, charges weren’t filed until a year after the employee had gone to work for a different municipality.
Loss prevention measures are the first line of defense against loss due to an employee’s dishonest acts. A strong risk management program should include the following: internal auditing for all financial records, separating cash-handling and account reconciliation functions, establishing countersignature procedures for checks, creating security procedures for computer operations, and formal employment policies including screening procedures for hiring new employees.
However, strong prevention measures can only go so far, and when employee dishonesty is uncovered, an organization should have appropriate insurance in place to compensate for the financial loss. Most insurance policies do not automatically include this coverage or provide very low limits not sufficient to make the employer whole. Many policies have very limiting definition of employee and the definition should be reviewed to confirm the policies fit the organizations operations. Examples of this would be organizations that employ, property managers, subcontractors or have volunteers.
Our account managers are available to discuss or provide more information on this needed insurance coverage.