Embezzlement is a common, unfortunate event that many businesses will need to address at some point. On average, fraud causes businesses to lose 5 percent of their revenue each year, according to a 2020 report by the Association of Certified Fraud Examiners (ACFE). Standard business insurance policies often exclude losses from employee theft, leading some vulnerable companies to purchase crime and fidelity insurance.
The Costs of Fraud
The median cost of an embezzlement scheme is $125,000, with losses topping $1 million in 21 percent of the cases, according to ACFE. The average scheme goes on for 14 months before it is detected, and more than half (54 percent) of the organizations victimized do not recover any of their fraud-related losses. Nearly 4 in 5 fraud cases involve more than one perpetrator, according to the 2018 Hiscox Embezzlement Study.
Common Ways to Steal from Employers
There are many ways employees and vendors embezzle funds from a company. The most common ways, according to Hiscox, include billing fraud, which may involve (1) the creation of fictitious vendors; (2) overstatement of payments made or inaccurate reporting of spending; (3) check and payment tampering, which includes writing company checks or diverting payments made to the company to personal accounts. Other methods include (4) theft of cash that the business keeps for day-to-day operations; (5) theft of company property or personal property of owners/managers; (6) payroll theft, which may include inaccurate recording of payroll and paying fictitious employees; and (7) skimming or unauthorized use of company credit cards.
Why Employees Steal
Embezzlers may work for a company for several years before they begin stealing. The motive can range from a personal financial crisis to disgruntlement with the company. According to Hiscox, a third of all perpetrators work in the accounting/finance department and 85 percent of fraud is committed by someone at the manager level or above. But embezzlement can happen in all areas of a company’s operations, and can be committed by any employee with means, motive and opportunity. Certain traits are common in embezzlers, including intelligence and the ability to pick up things quickly. Embezzlers are often eager to learn about different areas of the operation, even those that do not concern them. They may work long hours and not take vacations, to prevent others from accidentally discovering what they are up to. Embezzlers often live a lifestyle that is above their means – they tend to break rules and take risks in general, and they often express dissatisfaction with the company.
Employers need to set up a system of checks and balances to ensure no one person has end-to-end responsibility for any accounting, payroll or accounts payable function. Every transaction should be monitored by more than one person, and company owners should review bank statements for inconsistencies or unknown payments made. According to ACFE, 43 percent of schemes are detected by tips, half of which come from employees. Therefore, training employees on fraud prevention, encouraging them to report suspicious activity, and providing an anonymous means for them to do so are important aspects of fraud prevention. Pressing charges against employees who have stolen can also discourage future theft.
Crime and Fidelity Insurance
Vulnerable businesses can further protect themselves with crime and fidelity insurance. This type of insurance covers internal and external theft, including losses from employee dishonesty, embezzlement, forgery, kiting, robbery, burglary, computer fraud, wire transfer fraud, counterfeiting and other criminal acts. A rider is often needed to acquire extra insurance to protect the personal assets of management for such events as unauthorized use of credit cards, identity theft, and other crimes.
A “loss discovered” policy is generally preferable to a “loss sustained” policy. With a loss-discovered policy, your coverage applies to losses that were discovered during your policy period, and typically for 60 days after the end of the policy. So if you have had a crime and fidelity policy since 2020 and you discover thefts that occurred in 2017, those losses should be covered, as long as the policy has coverage for prior acts. Those losses would typically not be covered with a loss-sustained policy, however, in which the actual loss has to occur during your coverage period and typically for a limit of one year after coverage ended. A loss-sustained provision makes it difficult to recover losses from thefts that happened incrementally over long periods of time.
The cost for crime and fidelity coverage is based on three main factors: the nature of your company’s business and the type of exposure, the internal controls that are in place to prevent theft, and your past claims history.
Getting Reimbursed from your Insurance Company
Unfortunately, getting reimbursed from the insurance company is not as simple as making a claim. As we like to say in the insurance law business, “What the big print giveth, the small print taketh away.” Insurance companies put provisions in their policies to limit their liability and manipulate the language to their advantage.
If your business has been impacted by embezzlement and your insurance company has denied or is challenging your crime and fidelity insurance claim, give us a call. We have the experience, expertise and tenacity to make sure insurance companies keep the promises made to you and your business.
Contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack