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SAFEGUARDING AGAINST EMPLOYEE
DISHONESTY Many businesses are either required by contract or consider it good business to maintain fidelity or commercial crime coverage insurance, insuring against the dishonest acts of employees such as forgery, embezzlement and theft. The filing of a claim under a fidelity or commercial crime policy does not mean the entire loss will be covered. This is partly the result of being underinsured and partly the result of being unfamiliar with the fidelity or commercial crime policy. In the typical liability policy familiar to most businesses, coverage is purchased for occurrences during the term of the policy. Future occurrences are covered by a different term policy and in effect premium. This is NOT the case for fidelity and commercial crime policies. Here is a hypothetical scenario: Employer discovered that over the past five years a trusted employee has embezzled nearly $500,000.00, averaging nearly $100,000.00 per year. Employer purchased $100,000.00 commercial crime coverage with the same insurer for each year over the past ten years. Each year the insurer either issued:
Employer files a claim with its insurer for $500,000.00. Under each situation, the insurer will offer $100,000.00 as payment in full on the claim. How does the insurer justify paying only one limit of coverage or $100,000.00 for the $500,000.00 loss? Under renewal options one and two above, the insurer will claim that the policy is a continuing policy with but one $100,000.00 limit of coverage for the dishonesty of the employee, no matter how many years the employee’s thefts spanned. Even if the employer prevailed in court with the argument that the policy was not a continuing policy but rather separate yearly policies, the insurer will deny coverage beyond the first $100,000.00 based on the general conditions found in the policy that exclude “stacking” or “cumulating” coverage limits. The same denial is used if option three is applied to the hypothetical. The result – employer is still only entitled to one limit of coverage or $100,000.00 when the insurer issued separate but consecutive policies to the employer. In New York State, this is presently how insurers view the fidelity and commercial crime policies and deny coverage for losses caused by the same employee occurring over successive policy terms. The insurer’s position, however, is not unassailable, and an attorney should be consulted to review the policy and the claims made under the policy. So, what can a business do to prevent this potentially devastating outcome? First, be more vigilant with the oversight of employees that handle accounts and money. Create internal controls and stick to them. Look for warning signs that indicate an employee may be stealing funds: changing lifestyles, unusual behavior, or reluctance to take vacation time for example. Second, if a business wishes to continue with the same insurer year after year, it is imperative to be adequately insured for potential losses due to employee dishonesty occurring over several years, not just one year. Increasing the amount of coverage from $100,000.00 to $300,000.00 or more may be quite within the business’ budget. Third, a business can obtain its fidelity or commercial crime coverage from a different and unaffiliated insurer every time a new or renewal policy is required in hopes of avoiding the standard anti-stacking and non-cumulation policy provisions. Care must be taken that the new policy is independent of the prior coverage and does not constitute a mere “continuation” of the prior insurance, or incorporate any of the prior coverage’s policy conditions. Even so, this is the least favorable of these options, since installing adequate internal controls and increasing coverage limits are more sound business practices. At the very least, businesses should have their insurance policies reviewed and explained so that the coverage is understood. Businesses should not be reluctant to ask questions of the insurer or its agent. Only then can informed decisions be made regarding these matters.
DISCLAIMER: This information is based on New York Law, and is intended to provide general information to those who are not familiar with these issues. It is not intended to advise anyone in any particular situation, nor should anyone try to interpret or apply any of this information without assistance from an attorney.
Walsh
& Walsh, LLP
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