A local nonprofit client recently discovered that for many years an employee had skimmed money from several of their bank accounts. The embezzlement was slow, but in total the damage reached over $115,000. Employee theft or embezzlement claims can be significant, whether a one-time event or a slow drain. In our client’s case, the offending party had moved out of state. Locating them proved difficult, prosecution an uphill battle, and collecting damages impossible. The money was gone and the employee had no assets to pay back the debt. Fortunately, the nonprofit had the appropriate commercial crime insurance in place, forensic accounting determined the total amount stolen, and our client was reimbursed.
The Need for Commercial Crime Insurance
The threat of commercial crime arises from both internal and external sources. Internally, employees may steal money, securities, or tangible property such as tools, equipment, and inventory. Externally, forgers may access a company’s bank accounts by altering checks, notes, or other documents. Thieves may steal cash deposits or company property. Criminals may pay with counterfeit money, taking your product and leaving you with no compensation. And today, computer funds transfer is a prolific and growing threat. Just last year a client lost the entire down payment on a building due to wire transfer fraud. A hacker had unknowingly gained access to their email years earlier and had lain in wait, reading emails, finally taking advantage of the situation by sending fraudulent wire transfer instructions just when he knew the client was purchasing the building.
Many ways exist to reduce the risk of commercial crime that do not involve insurance. Maintaining security policies and procedures is a great start. Listing these is outside the scope of this article, but most business owners are already aware of what is expected. If you are a client of Bankers Insurance, many security articles and checklists can be found using your MyWave subscription. Here are a few suggestions:
- Maintain a clear separation of accounting duties and cross-train employees.
- Never give employees who maintain bank accounts the ability to sign checks.
- Restrict who can write checks with your bank.
- Require two signatures on checks over a specific amount.
- Perform background checks on employees who maintain bank accounts or sign checks.
- Control employee access to inventory and institute appropriate physical security around your building and property (fences, locks, etc).
- Change passwords regularly.
Commercial Crime Insurance
Even with all appropriate checks and balances in place, commercial crime may still occur. For such a situation, commercial crime insurance may be added to an existing commercial insurance package or purchased separately. Policies vary, but this protection generally includes protection for:
- Employee Theft: Theft of money, securities, or other company property by an employee.
- Forgery or Alteration: Theft by forged or altered checks, drafts, promissory notes, or similar documents.
- Theft Inside and/or Outside the Premises: Theft of money, securities or other property by someone other than an employee.
- Computer and Funds Transfer Fraud: Not to be confused with the broader cyber liability insurance, this coverage pays for fraudulent computer entries, fraudulent money/securities transfer, and fraudulent payment instructions. This is the section of the commercial crime insurance policy which protected our client that sent their building down payment to the wrong bank account discussed earlier.
- Counterfeit Money
Which Policy Pays?
In the case of our nonprofit client, the embezzlement occurred over many years. In order to cover the entire loss in such a situation, many commercial crime policies are written on a “discovery” basis. This means that the policy in force at the time the theft is discovered will pay for the entire loss, even though the actual theft occurred years before that policy was in force. Other commercial crime insurance policies are written on a “loss sustained” basis, meaning each policy will pay for the theft that occurred while it was in place. Which is best in your situation? Coverage gaps can occur when replacing one type of policy with another, so ask your insurance agent.
What Isn’t Covered?
- Acts committed by company owners.
- Inaction: Theft by an employee who is known to have stolen before.
- Indirect losses: For example, lost income if your business must be shut down as a result of the theft.
- Loss caused by stolen confidential or personal information, or any nonpublic information. *
- Expenses to produce evidence and forensic accounting.
- Any theft of data stored electronically such as plans, trade secrets, or client/vendor lists. *
- Fines and penalties.
- Theft proven only by inventory calculations.
- Legal fees.
Fortunately for our nonprofit, they also had directors and officers insurance in place which protected the board of directors from ensuing lawsuits from their members and donors, asserting a breach of duty and negligent hiring.
If you have any questions regarding how to reduce your risk of commercial crime, or questions regarding commercial crime insurance, or if you are concerned about risks assumed by your board of directors, contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office and provided a phone number that rings right on their desk.