BY: Robert B. Jones, CIC, President’s Club
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Employee theft is not covered by a standard property insurance policy. Business theft insurance protects against such risks. Theft is a common business loss and can arise from internal and external sources such as employees, clients, suppliers, and third parties of all kinds. However, employee crime is the most common business theft experienced.
Property insurance policies protect assets primarily from external risks. Internal threats are under the control and supervision of the business, thus are not covered by standard policies. For example, should a business owner willfully destroy a piece of equipment, such damage is not covered because the owner intended it to occur. In the same way, standard insurance policies do not cover the willful acts of employees, including theft. This is where business theft insurance is of value. Consider the following employee crime examples:
- embezzlement: theft of money, currency, or investments
- theft: of equipment, merchandise, or other assets
- fraud: such as falsified invoices paid to an entity controlled by the employee
- skimming: favorable business terms given to a client or supplier in exchange for a portion of profits.
- forgery: falsifying payment authorizations
Our experience shows that employee theft is usually not a single event, but rather occurs over time. Typically, it begins with experimentation – the theft of a small amount – and increases as the employee gains knowledge and confidence.
Business Theft Insurance
Although standard property insurance does not cover employee theft, some insurance companies include a limited amount of protection through policy enhancements. Though helpful, these enhancements offer lower limits and narrow coverage. Instead, the best place to look for coverage is in a stand-alone business theft insurance policy. These can be tailored to protect against many kinds of crime, not only that from employees. Coverages available can include:
- employee dishonesty/theft
- theft, disappearance, and destruction, both on and off business premises
- robbery and burglary, both on and off business premises
- forgery and alteration
- computer fraud – reference Cyber Liability Insurance for thorough coverage of this dynamic risk
- safe deposit box coverage
- safe deposit box liability
- securities deposited with others
- liability for guest-owned property
- counterfeit currency and money orders
- kidnap and ransom
Loss Sustained versus Discovery
Details matter, and with business theft insurance, one of the most important considerations is what kind of policy to purchase, either A) loss sustained, or B) discovery. The difference is critical, as coverage for the two is triggered in separate ways. Ask your insurance broker which is best for your situation. Loss sustained policies require the crime to be sustained within the policy term. Discovery policies simply require the crime be discovered within the policy term; the theft could have occurred prior.
Remember that we said employee theft was the most common commercial crime, and that it often occurs over time? In fact, frequently thefts occur long before they are discovered. Now consider a scenario in which an employee steals $100,000 a year for five years, totaling $500,000. If the business discovers the issue in year five and has a loss sustained business theft insurance policy with a standard twelve-month term, it will only pay $100,000 for the loss sustained during that year. The business would have to rely on prior policies (assuming they exist) to pay for the loss sustained in prior years. By contrast, a discovery policy would pay the entire $500,000 because the loss was discovered during the existing policy term.
These examples illustrate the difference in business theft insurance policy types and why it is important to discuss coverage details with your insurance broker. Each business has a different tolerance for risk, and great value exists in matching coverage to risk tolerance.
The best means to protect against employee theft or any commercial crime does not involve insurance. Before purchasing a business theft insurance policy, consider where the potential for employee crime exists and take action to reduce it. Often, this requires minimal effort and zero cost. A few best practices include:
- Separation of Accounting Duties: Ensure whoever pays the bills does not also reconcile the bank accounts.
- Accountability: Require payments over a certain amount necessitate two signatures or approvals.
- Hire Informed: Perform criminal background checks for anyone that manages assets.
- Security: Track inventory. Monitor equipment and tool usage. Install video recording equipment in key areas. Regularly spot-check accounting records and bank reconciliations. Have an independent party audit financials yearly.
Purchase business theft insurance after taking such actions and the risk of employee crime is reduced. This way, the business will not only receive lower pricing, but they will also have less chance a theft will occur in the first place. Questions on business theft insurance? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each of our clients is assigned a personal insurance agent and provided their email address as well as a phone number that rings right on their desk.
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