Employee Dishonesty coverage...Beyond The Bond

No business owner likes to think that his employee would steal from him or his customers.  Unfortunately, according to the US Chamber of Commerce, employee theft accounts for billions of dollars in losses for US businesses each year.  The FBI reports that employee theft is among the fastest growing crimes in the United States.

So, what next?  Some may decide to purchase Employee Dishonesty insurance coverage and hope for the best.  But the wise business owner knows that the cost of employee theft goes beyond the value of the property stolen.  Even with the proper insurance protection, the ramifications for the business are significant, including

• Loss of customer trust and prospective referrals
• Negative word-of-mouth
• Damage to employee morale
• Lost productivity and distraction caused by police investigation
• Cost in both money and productivity related to employee turn-over

What can an employer do?  Is it even possible to curb employee dishonesty? 

Experts agree that there are steps an employer can take to reduce the likelihood of theft by employees.  In order to address the problem, it's necessary to consider some of the factors that may set the stage for employee theft:

• Pressure – Economic pressures that may cause unpredictable behavior can include drug or alcohol dependency, gambling, or even divorce or serious illness.
• Attitude – The feeling an employee has that he/she has not been treated fairly by management may lead to a justification for theft.
• Opportunity – Even the most honest person might be tempted to do something otherwise out of character under the right (or wrong) circumstances.

As an insurance agent, I'm not afraid to tell you that when it comes to employee dishonesty protection, insurance coverage is not enough; it's just part of the equation.

From an insurance perspective, the three keys to dealing with the employee fidelity exposure are:

• Prevention
• Policies & Procedures
• Protection

1. PREVENTION

LOSS PREVENTION is not only a critical management function; it just makes good sense for a healthy, profitable business. 

For service industry businesses, effective and consistently-applied policies & procedures protect more than the bottom line – they safeguard key company assets like employee morale and customer goodwill.

Apply loss prevention through sound employee selection practices: †

• Criminal background checks are a must.
• A thorough interview process asks the right questions and demonstrates to the job applicant that you're serious about hiring good people.
• During application and interview, look for signs of instability through prior work experience or lack of candor in response to questions.
• Immediate and thorough post-hire employee orientation lays a firm foundation of your performance expectations.
• Management and supervisor attitude and behavior let the new employee know about the character of your organization.

† All employment related practices must be conducted in compliance with the laws of your state.  Consult legal counsel familiar with your state's employment practices law for advice and guidance.

Apply loss prevention through ongoing practices and procedures:

• Fair compensation
• Professional and cordial work environment
• Positive employee relations practices
• Employer-sponsored activities to encourage positive employee morale
• Visible security measures and appropriate management oversight
• Management awareness of employee performance, including instability or poor work habits.  Past conduct is a prime indicator of future behavior.

So, you've done all you can to prevent an employee dishonesty loss, and despite your best efforts, your customer comes to you with an allegation of employee theft... 

2. POLICIES & PROCEDURES

POLICIES & PROCEDURES once again come to your aid.  Properly applied, these practices will expedite the claims process and minimize the negative impact to your staff and your customer.

When it comes to employee dishonesty allegations, it's good to know that you don't have to be the judge. Your job is to apply your established procedures and have information available for the police and insurer.

EMPLOYEE DISHONESTY CLAIMS Do's and Don'ts

† The below is general information from an insurance perspective and should not be construed as legal advice.  As in all such matters, legal counsel should be sought, especially for more complex or substantial claims.  Your conduct should at all times remain in compliance with the employment practices laws of your state.

DO conduct a fair and accurate preliminary investigation.  Move promptly.  Any investigation should be conducted by management other than the direct supervisor who may have first noticed the behavior or reported the incident.

DO contact your insurance agent to determine your rights and duties under your insurance policy.  Prompt notice of loss to the insurer is a condition of the policy.

DO contact the police if you receive evidence that a crime may have been committed.

DON'T express an opinion as to guilt or innocence while questioning witnesses.  Remember that your role is that of information gathering to pass on to the appropriate parties.

DO use a standard investigation procedure and a written form to ensure that all relevant issues are addressed and that nothing outside the proper scope of questioning occurs.  Document witness interviews and get signatures.  Employee witnesses should be reminded to maintain confidentiality.

DON'T do or say anything that could compromise the insurer's rights against third parties.  If you compromise your rights, you compromise those of the insurer, which may affect your ability to recover under the policy.

DON'T make any promises to suspected/accused employee(s) or insist upon a confession.  Do not use any method to obtain information that might be construed as coercive, which may expose you to possible legal action by the employee.

DO seek legal advice while police investigation is pending regarding how to handle the employee(s) involved (suspension, termination, or other appropriate action based on evidence and laws of your state).

3. PROTECTION

What's the right employee fidelity protection for your business?

• Is there coverage for customers' property?

First of all, any business that has employees on customers' premises needs employee dishonesty coverage (sometimes called a Fidelity Bond), that specifically protects the customers' property.  A standard first-party Employee Dishonesty Bond does not respond to employee theft of customer's property.  Make sure you have “Third Party” or “Business Services” employee dishonesty coverage to protect you from losses resulting from employee theft of your customers' property. 

• Does policy language require a written contract with your customer?

Some insurance policies include wording that requires there to be a “written contract to perform services” in order for employee dishonesty coverage to respond.  If you have any clients where there is no formal contract, this is a problem.

• Is employee conviction required for the policy to pay?

Another clause that is sometimes overlooked in many employee dishonesty insurance forms is a requirement that there must be a conviction of the employee for the bond to pay.  In cases where the suspected employee flees before conviction can be obtained, evidence is insufficient, or the local jurisdiction declines to pursue prosecution for whatever reason, this leaves the business owner holding the bag.  A bond with a conviction requirement is much less likely to pay than one without this restriction.

The old adage that “the best defense is a good offense” certainly holds true when it comes to employee dishonesty protection.  Apply effective and consistent employee practices and procedures, both pre- and post-hire, and you'll be ready should an allegation arise.

† Moody Insurance is not a legal firm, and we encourage all consumers to seek legal counsel on matters related to employment practices.  The foregoing expresses the opinions of the writer from an insurance perspective.  Do not rely on this general information to evaluate any specific legal issue.

Author, Laura Bianchini is a senior account executive at Moody Insurance Worldwide.  She has earned the respected industry designations of Certified Insurance Service Representative (CISR) and Certified Insurance Counselor (CIC).  A key member of Moody's National Accounts Division, Laura has specialized in insurance for professional cleaning services for over ten years.  Laura can be reached at (800) 966-0001 ext 3009 or via email at [email protected].