Protecting Against Fraud

In a world where fraud runs rampant, how can a business owner adequately protect their company? The first line of defense should always be strong internal controls, including anti-fraud controls, but additional protection can be obtained through a commercial crime insurance policy. We discuss below the coverage aspects of commercial crime insurance and which organizations are the best candidates for coverage.

Coverage

Often referred to as fidelity insurance, these insurance policies can be added to the business owner’s policy (BOP) and cover fraudulent acts committed by a business’s employees that are not covered under a standard liability policy. When any employee or individual working on your behalf steals from a customer or client, crime insurance can provide and facilitate reimbursement for the stolen amount according to Insureon, an online marketplace for business insurance. Some of the wrongful acts covered by the insurance may include the following:

  • Employee dishonesty or theft
  • Vendor theft
  • Forgery or alteration
  • Computer and funds transfer fraud
  • Burglary and robbery
  • Counterfeit money
  • Employee Retirement Income Security Act (ERISA) employee dishonesty

What Is Not Covered

Commercial crime insurance policies do not cover business mistakes or accounting errors; such coverage for this exposure falls under a business’s errors and omissions insurance for their professional liability insurance. In addition, commercial crime insurance does not cover the following:

  • Employees with criminal records known to the employer
  • Crimes committed by the business owners or senior management
  • Theft or vandalism committed by non-employees
  • Indirect financial losses, such as business interruption, loss of income or legal expenses

Should You Have Commercial Crime Insurance?

While you want to believe that you have hired trustworthy employees, even those most trusted individuals could find the opportunity, rationalization, and pressure to commit fraud. Some research from the FBI has found that 30 percent of employees will never steal, 60 percent would steal if they knew they wouldn’t get caught or if they thought others were doing the same, and 10 percent will actively seek an opportunity to steal, according to an article published by the Association of the Wall and Ceiling Industry.

The Cost of Fraud to a Business

Other statistics on the subject are just as sobering:

  • 75 percent of employees admitted to stealing at least once from their employer. (Source: Embroker)
  • U.S. businesses lose approximately $50 billion every year from employee theft, with costs rising 15 percent annually. (Source: U.S. Department of Commerce)
  • One in three business bankruptcies are caused by employee theft (Source: Statistic Brain)
  • The average fraud case costs a company $1,509,000. (Source: ACFE)
  • A third of fraud cases occur because companies lack internal controls. (Source: ACFE)

Are you and our business a good fit for commercial crime insurance? In short, any business that handles financial transactions for customers should at the very minimum consider a commercial crime insurance policy. This insurance is available for public and private companies, as well as non-profit organizations.

For some businesses, they may even be required to have this coverage. Companies that manage an employee benefit plan, such as a 401(k), are required by ERISA to have a commercial crime insurance policy. Other industries, such as the tech industry, may find that their clients require them to obtain coverage to be awarded their work.

Benefits of Coverage

As with standard insurance policies, for the cost of premiums and the deductible, your business can be covered by criminal acts committed by your employees. For specific policy information available for your company, reach out to your insurance provider to discuss; however, some standard limits for a policy may be a $1 million limit with a $10,000 deductible or a $500,000 limit with a $5,000 deductible. In addition to coverage for any bad act, your policy may also include legal services and/or forensic accounting services to investigate the fraudulent acts.

Windham Brannon’s forensic and litigation services team has premier knowledge and experience in assisting insurance carriers and legal counsel by investigating claims, examining transactions, and quantifying the extent of the loss. For questions or more information about commercial crime insurance or fraud, talk to your Windham Brannon advisor.