February 6, 2015

Depending on the justice system to restore embezzled funds is often a forlorn hope. Only 14 percent of businesses make full recovery from guilty parties.

Standard business liability insurance doesn’t cover losses by theft. Fortunately there is special coverage available called crime or fidelity insurance.

This type of policy typically covers both internal and external crime. Burglary, robbery, counterfeiting and wire fraud are examples of crimes usually committed by those outside the company.

Internal crime, also called employee dishonesty, involves more than cash. Employees also steal inventory, equipment, supplies and information.

Hands unpacking a yellow envelope with moneyHow the policy defines employees can be a tricky area because others besides full-time, permanent staff might have access to assets and sensitive information.

The most comprehensive policies have a broad definition that includes leased, temporary and seasonal employees, non-compensated officers, former employees and board members acting as consultants, interns and attorneys on retainer.

Coverage is either on a discovery or loss-sustained basis.

With loss-sustained coverage, the event must occur during the policy period. Discovery allows claims made for losses discovered during a covered period – even if they happened before the policy was in force. Since many thefts occur in small amounts over periods of months or years, the discovery policy may be best if your company has been operating without it and you are at risk.

Special coverage options include protection of management’s personal assets – covering identity theft and unauthorized use of credit cards, a risk when a manager’s personal information is available at the office, on expense reports for example. Coverage of subsidiaries and employee benefit plans are often features of crime policies.

Insurance companies, while happy to offer this coverage, don’t simply pay up. They often have recovery management units who specialize in pursuing all avenues to retrieve funds and minimize losses.

In addition to pursuing legal remedies, the insurance company might file claims against banks that hold or remit funds obtained fraudulently. Sometimes the company enters into a joint recovery agreement with the insurance company, which can mean splitting proceeds after costs or recovery of deductibles paid.

There are a number of factors determining the cost of crime insurance, some of which you can manage. One primary factor is your industry and the type of exposure normally encountered. You may not be able to do much about that. But the strength of your internal controls can influence premium cost. So does your claim history. The rest of the cost will be dependent on the company you chose and the depth and breadth of coverage.

As with any insurance, it makes sense to work with a company that receives high independent rankings from rating companies and has a good track record of paying claims.

When you’re under the duress of dealing with the betrayal and stress of embezzlement, the last thing you need is a hassle with your insurance company.

This article was originally posted on February 6, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.