Insuring against employee fraud

Imagine finding out that your bookkeeper was forging your signature and issuing herself illicit checks. Or that she was using the company credit card to pay personal bills or buy personal items.

Although unnerving, scenarios like these happen every year to honest business owners. It’s no small potatoes loss, either. Insider fraud costs businesses tens of thousands of dollars because, by the time it’s detected, the theft has occurred over many months, often resulting in a six-figure financial loss that can decimate a company’s solvency.

What motivates an employee to steal from his/her employer?

Every fraudster shares three characteristics that lead him/her to steal. They are:

• A perceived, unshareable financial need, such as a gambling problem, mounting debt or greed.
• The opportunity to access company money for personal use.
• The ability to rationalize that the theft is earned or justifiable.

Related: What coverage applies to alleged thefts by employees?

How can insider fraud be deterred?

Several important internal controls can help reduce the likelihood of employee fraud, including:

• Segregating duties (e.g. making sure the person who pays company bills cannot also sign checks; making sure the person who posts customer payments cannot also post credits to customer accounts)
• Reviewing bank statements and paper copies of canceled checks every month
• Restricting employee use of company credit cards and thoroughly reviewing credit card charges after the fact
• Verifying processed payroll contains authorized payments and deductions for employees
• Using a hotline for whistleblower tips.

Even companies who exercise these best practices against fraud can find themselves victims of an unscrupulous employee, costing the business thousands of dollars. That’s why it’s so important to be on the offense. Beyond instituting stringent internal controls, one of the best ways to survive insider theft in the unfortunate event it does occur is to carry appropriate employee dishonesty insurance.

Related: 5 tips for tackling the risk of embezzlement

What is employee dishonesty coverage?

Put simply, it’s an insurance policy that protects employers from financial loss due to employee theft of money, securities or property written with a per loss limit, a per employee limit or a per position limit. It can also be referred to as:

• Crime coverage
• Employee dishonesty bond
• Fidelity bond
• Crime fidelity insurance

Related: Employee fraud: 6 steps to substantiating your claim and recovering losses

Why do businesses need employee dishonesty insurance?

Employee theft is a significant problem for U.S. businesses. According to the Association of Certified Fraud Examiners (ACFE), on average, businesses lose 5% of their annual revenue every year to internal theft. Worse, companies with less than 100 employees, which comprise more than 95% of the American economy, are the number one victims of internal fraud. While it’s often an employee who steals, the perpetrators can also be independent contractors, partners, volunteers or seasonal workers. No matter the crook, having adequate employee dishonesty coverage covers losses from their theft.

Related: How to insure against employee dishonesty

What acts does employee dishonesty insurance cover?

Employee crime and theft-related loss are not typically covered by commercial property insurance. As part of a comprehensive commercial crime policy, employee dishonesty insurance protects against employee theft or dishonest acts. It does not cover employees who steal from customers; that requires a separate business service bond.

Any time an employee intentionally takes money or goods from a company, it is stealing. Examples of the types of theft that would be covered under employee dishonesty insurance include:

• The manager of a high-end restaurant steals expensive food items, then covers up the loss by manipulating the inventory records.
• An employee in a busy dental office uses the company credit card for personal purchases, or diverts customer payments into her personal account instead of applying them to the bill, hiding the discrepancy as an insurance payment or write-off.
• A sales executive for a software firm inflates his expense report, falsifying reimbursements by associating personal purchases as company expenses or exaggerating mileage use.

Related: Examining temporary staffing agency risks

How much coverage do businesses need?

Depending on the size and nature of the business, the amount of coverage recommended can fluctuate. At a minimum, all businesses should carry a $100,000 policy. Consider the sobering fact that the median cost of fraud in a small business (<100 employees) is $200,000, as compared to a business with more than 100 employees, where the median loss is $104,000. The good news? For a $100,000 policy, the annual premiums won’t break the bank — likely a few hundred dollars each year. The rate is based on the number of employees and the amount of coverage needed. An agent or broker can assist with selecting the policy and coverage that will provide the best protection.

No employer sets out to hire a dishonest worker, but the fact is it’s often the most tenured and trusted employees who commit these crimes. For many victims, business survival in the aftermath of a financial crime is dependent on the availability of cash. Cash that has often been squandered by their once-trusted employee, leaving the prospect of restitution slim. The availability of an employee dishonesty policy is often key to a company’s ability to continue in the aftermath of a financial loss.

Related: How small businesses can better protect themselves

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm. She can be reached at tcouch@acuityforensics.com or 360-573-5158.