Forgiving Employee Theft May Void Coverage for Future Embezzlement

If you forgive an employee who has stolen from your company and then that person steals again, you may be voiding any potential insurance recoveries.

The problem of not being able to recover any losses through your fidelity coverage would typically stem from not reporting to your insurer the original instance of theft. You may also void coverage if you suspect theft and do not conduct an internal investigation.

Fidelity policies have a number of provisions and caveats for paying claims and it’s important that you understand them in order to be reimbursed for damages you suffer from an internal thief.

To make sure that you can get your claim paid, you need to ensure that you follow the rules of your policy and that you especially don’t forgive the employee and let them stay on the job.

If the insurer, upon investigation, finds out that you forgave the worker and kept them on after the first instance of theft, it could argue that failure to report would void the coverage.

That’s because employees that steal, will typically not steal just once. If they get away with it the first time, they will likely take more the next time around.

Prior dishonest acts generally void coverage if the insured knew about them.

An insurer’s subsequent investigation after a theft report would focus mostly on coverage issues and whether the employee was responsible for other theft at the company.

Timely notice in writing

Under the terms of their fidelity policies, employers have a duty to give timely notice to the insurer in writing after first discovering the loss.

The same would likely not hold true in the case of employee negligence that caused a loss and the employee tried to cover it up to keep their job. In such cases, the original loss may not be covered, but the subsequent losses (actual theft) might be.

You may also void coverage if you suspect fraud or theft, but do not investigate.

Employee Embezzlement on the Rise – Are You Protected?

A typical organization will lose an estimated 5% of its revenues every year due to fraud, according to a study by the Association of Certified Fraud Examiners.

The median loss among organizations both large and small was $140,000 per occurrence, and more than 20% of embezzlement losses were more than $1 million, the association found.

With those staggering numbers in mind, if you have not already done so, you need to take steps to reduce the possibility of employee theft – and also make sure you are adequately covered if they do steal from you.

Small organizations are especially susceptible to losses from employee embezzlement. These problems are often seen in cash-heavy businesses, or those with large inventories, but employee embezzlement is most frequently experienced in organizations lacking owner oversight of financial processes, usually due to placing far too much trust in employees and having no internal controls.

The new study by the fraud examiners association was released as another study, this one by professional security firm Marquet International, found that arrests and indictments for embezzlements had reached a five-year high in 2012.

Embezzlers are most likely to be a company bookkeeper, accountant or treasurer, who is female, in her 40s, and without a criminal record. The reason it’s more often than not a woman is that they are typically in the three aforementioned jobs.

How do they do it?

Marquet International in its study found that the most common ways of embezzling are:

• Bogus loan schemes, which include cases in which fraudulent loans are created or authorized by the perpetrator from which funds are taken for their own benefit.

• Credit card/account fraud cases, which involve the fraudulent or unauthorized creation and/or use of company credit card or credit accounts.

• Forged/unauthorized check cases, which are those in which company checks are forged or issued without authorization for the benefit of the perpetrator.

• Fraudulent reimbursement schemes, which include expense report fraud and other cases in which a bogus submission for reimbursement is made by the perpetrator.

• Inventory/equipment theft schemes, including those cases in which physical corporate assets were stolen and sold or used for the benefit of the employee.

• Payroll shenanigan cases, including all forms of manipulation of the payroll systems in order for the perpetrator to draw additional income.

• Theft/conversion of cash receipt cases, which involve the simple taking of cash or checks meant for company receipts and pocketing or converting them for one’s own benefit.

• Unauthorized electronic funds transfers, including those cases in which wire transfers and other similar transfers of funds are the primary mode of theft.

• Vendor fraud cases, which include those where either a bogus vendor is created by the perpetrator to misappropriate monies or a real vendor colludes with the perpetrator to siphon funds from the company.

Thwarting embezzlers

Liability insurer Camico suggests that educating employees on the detrimental effects of employee fraud on the organization can reduce the likelihood of embezzlement.

Also, if you implement a regular review of bank and credit card statements, you’ll have a better chance of catching a thief. Company owners should look at the cleared transactions to determine the legitimacy of payees, including examining actual cancelled checks.

Also, it’s easy for transactions to be changed in the accounting system after the fact. An ill-intentioned bookkeeper could use this tactic to cover up their tracks. If you feel you do not have the time or expertise to oversee you finance department, you should contract with a qualified CPA to perform these checks and balances.

There are also inexpensive physical barriers that should be used to deter criminal activity. To protect cash, you can buy a $200 drop-slot safe to securely keep the night’s deposit until it is taken to the bank.

Similarly, security cameras deter misbehavior and can be the source of valuable evidence in case an incident occurs.

Securing coverage

Finally, you should consider taking out a crime insurance policy.

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.

But a crime insurance policy protects against loss of money, securities or inventory resulting from crime. Common crime insurance claims include employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire-transfer fraud, and counterfeiting.

Call us to discuss whether a crime policy is right for your company.