March 27, 2017 

On a proven employee theft where the employee bookkeeper entered fraudulent payroll or commissions which the employer paid until discovery of the scheme, would the payroll taxes and social security contributions made on the fraudulent portion be considered a DIRECT LOSS as opposed to an INDIRECT LOSS and therefore be covered as part of the claim under the standard employee theft policy? We have an issue with an insurance carrier who is treating the payroll taxes and social security contributions as an indirect loss and is excluding them saying they will only pay the “net” loss which is the net amount on the employee's payroll check. Please advise.

New York Subscriber

 

I'm looking at the ISO CR 00 28, Employee Theft and Forgery Policy. The payroll taxes and social security contributions were made on the fraudulent portion of the pay when the fraudulent payroll went through. It is a direct loss, the same as the loss of payroll. Just because it is funds designated to the government that the thief did not directly get does not make it an indirect loss. The payment of social security and taxes was not something that the insured incurred in order to establish the theft, nor was it an inability of the insured to realize income; it was a direct loss of funds caused by the employee's fraudulent actions. The loss should be covered.

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