Security Risks Throughout History

Security is big business. Historically, society has sought security through its government. Whether it was the Roman Army that kept the peace or the town marshal who ran the gunslingers out, we have turned to our officials for protection from a variety of enemies. That is official security, the governmental agencies created for the specific task of protection.

For hundreds of years, however, businesses and other non-governmental institutions also have provided private security. As Paul Newman asked Robert Redford in the movie Butch Cassidy and the Sundance Kid, when the two train robbers were being pursued by an army of Pinkerton detectives, “Who are these guys?” The same questions were asked in labor disputes such as Pittsburgh's Homestead Strike in 1892, when the Carnegie Steel Company hired hundreds of Pinkerton agents to help break the strike. The result was a battle that required the military — public security — to restore order. Damaging and fatal strikes and riots have filled American history.

Security agencies are among the major businesses of the United States, providing a variety of services ranging from private guard services to the rescue of kidnapped executives. Corporations now even operate prisons under contract to the government. Citizens pay higher real estate or rental prices to live in gated communities, where security guards patrol neighborhoods or limit access to premises. Burglar alarm system operators compete to serve homes and businesses, car alarms and “panic button” electronic keys protect our vehicles, and sales of mace and handguns, and even fierce dogs, for self-protection are growing. The evening news suggests that criminals and terrorists are everywhere; the world is not safe, but security vendors hope that they can convince viewers that their services or products will make them safer.

These are all issues of and for risk management. Since man first lived in caves and threw rocks at mastodons, society has sought ways to make itself safer. Realizing that there was safety in numbers and danger in isolation, society gathered in villages that grew into cities. It built walls around the cities, and posted guards to watch for enemies or strangers who might bring dread diseases. All too often, unfortunately, the risks of disease, violence, and crime came from within the cities, rather than from outside. Society built its cities on hilltops or provided fortifications. It created laws to provide a minimum standard of behavior for its citizens. It invented locks for its doors, police to prowl the streets and catch lawbreakers, and jails in which to isolate miscreants.

Unlike earlier societies, we no longer build our cities on hilltops or construct high walls around them to keep strangers out. Those loss prevention techniques have given way to newer and more modern processes. However, as with the ancient methods, many of the current risk control tools do not really prevent loss, although they may deter it. For example, an alarm system does not keep a burglar out, although it may hasten his departure with the family silver that he has stolen. Neither a fire extinguisher nor a smoke alarm prevents a fire from starting; unlike sprinkler systems, they only work if someone is there to hear the alarm and use the extinguisher. Having a guard at the gate still may not prevent the break-in, rape, or murder.

Each of these loss control steps produces risk costs regardless of whether a thief breaks in, a fire occurs, or a terrorist attacks. Alarms and the companies that monitor them (often from hundreds of miles away) are expensive. Burglar bars may keep thieves out but, in the event of a fire, may keep occupants trapped inside. Fire suppression systems are costly, and their requirement under many commercial building codes and regular maintenance adds to the cost of construction. Even with all of the screening, surveillance, monitoring, and guarding, acts of terrorism and crime may still occur.

The risks created by security fall into three categories:

1. Liability for the failure of the security system or service to prevent loss;
2. Liability for injuries or damages that may arise out of the providing of or failure to provide sufficient security;
3. Invasion of privacy or violation of civil rights arising out of the providing of security.

The costs associated with providing security usually cannot be transferred. Some offsets, such as insurance discounts for security (alarms, type of construction, presence of guards) do reduce the cost of risk, but not the cost of providing the security. However, some of the costs associated with risks that arise out of providing security can be transferred, usually through insurance mechanisms or via contractual agreements.

Employee Screening

Security risks related to employment are diverse, but fall into two distinct arenas: providing security and related privacy for current or prospective employees; and providing protection for the entity and its customers from employees or vendors.

Since at least the beginning of the 21st century, many political and social observers have commented on the increasingly strained relationships between employees and employers. Some cite a deterioration of the loyalty level that may (or may not) have existed in an era before words such as downsizing, outsourcing, restructuring, layoffs, furloughs, and similar terms, all meaning job termination, became common.

Obviously there always have been job terminations, whatever they were called. In societal transition from one era to another, employment often will shift from one type of job to another. The invention of the steam locomotive put canal diggers out of work, but they soon found jobs building railroads. Personal computers and e-mail meant that the typical mid-level office worker no longer had a stenographer or secretary to do paper work. In a paperless economy, that same person might be needed for data entry or other clerical work. Steamboat pilots became airline pilots; farming became the food production industry. Even in Japan, where the concept of cradle-to-the-grave employment and employer-provided benefits once were considered virtually a birth-right, economic change has meant less job security and heightened tensions between worker and boss.

While jobs change, psychological characteristics of workers do not. Employees continue to feel, and often express in overt ways, frustrations, anger, jealousy, fear, spite, and other emotions. Such expressions can have a devastating impact on employers. When frustration or anger over a job loss leads to a violent reaction, the current term used to describe the employee is “going postal,” with reference to a number of terminated U.S. Postal Service employees who have returned to the workplace to shoot employees and managers.

Such violence is not limited to the government, however, a fact that worries many employers. Employers often are the victims of emotional responses expressed through employees' acts of vandalism, breaches of confidentiality regarding co-workers, lying, theft, including overt time-theft, labor agitation, and similar behavior. Not all of this necessarily is illegal and, in some cases, employees' hostile reactions (as in whistle-blowing on employers' criminal or fraudulent activities or organizing for labor unions) actually may benefit society. One workplace violence survey showed that 57 percent of human resource personnel were “somewhat or very concerned” about workplace violence, and that 82 percent conduct background investigations of potential employees, an increase from 66 percent in 1996.

In my article, “Fire and the Innkeeper,” published in the CPCU Journal in June 1984, I traced the cause of high-fatality hotel fires and found that employee arson was a factor in a large number of such fires. These included the 1980 Stouffer's hotel fire in Harrison, N.Y., in which 26 guests died; the 1981 Las Vegas Hilton fire, which killed eight; and, after the article was published, the San Juan Dupont Plaza fire in Puerto Rico.

What steps can employers take to try to prevent employee-caused losses? Prevention must fall into two categories: pre-hiring screening, and post-hiring observation and assistance. It is not just criminal background that may be a significant indicator of a potentially dangerous employee. A number of factors may contribute to hostile or dangerous situations. Proving that an employee acted dishonestly in committing a crime depends on issues such as the employee's “manifest intent” to cause loss to the employer and gain to the employee. Furthermore, under employee dishonesty bonds, once the employer has knowledge of any “dishonest” act by an employee, either before or during employment, fidelity bond coverage applicable to that employee ceases.

This can present a problem when an employer is overtly security-conscious. For example, if an employer screens applicants or hired employees through lie detectors, and an employee admits a previous “dishonest act” that occurred many years earlier or was never prosecuted, the employer now has knowledge of such an act and fidelity bond coverage ceases as to that employee. If the employee is one whom the employer wishes to hire or retain, the employer must obtain an exemption from the surety. Suppose, however, that the employee does not admit any dishonesty, but the lie detection device records a deviation, indicating dishonesty. Does bonding cease for such an employee? Could the hiring of such a person create a bonding coverage issue years later if the employee were to commit a subsequent act of dishonesty, causing the employer a loss?

Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim adjusting textbooks.