Think it can’t happen to you? Think again.

Crime insurance is one of the most overlooked aspects of the typical insurance program.

Unfortunately, we have seen it happen all too often. A business owner declines to purchase crime coverage because they trust their team. Only to find out later that a "loyal" employee was stealing from them the whole time.

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Employee Dishonesty

Employee Dishonesty coverage will reimburse the employer for losses sustained resulting from the dishonest acts of the insured’s employees. The acts must cause the insured to sustain loss, and the employee to obtain a financial benefit.

Claim Scenario: Trusted Employee Steals Up To $300,000 From Company Inventory

Sure, Pete knew something was amiss with his cash flow. His sales numbers were good, but he was not able to achieve the bottom line profits that he believed should be there. He scoured through his expenses and confirmed all the sales numbers. It wasn’t until he noticed that his inventory wasn’t lining up that he came to the realization that an employee was stealing large sums of product from him.

I’m not asking you to view every employee with suspicion, but as former President Ronald Reagan used to say of the former Soviet Union “Trust but verify.”

Unfortunately, I’ve seen it happen time and again and in all industry types, from manufacturing to distributors, retail stores, restaurants and yes, even insurance agencies. In each of the last several cases we experienced, it was in fact the most trusted employees that were the culprit of the theft. There are safeguards you can put into place in attempt to protect yourself. If not already in place, consider instituting the following procedures:

  1. Have someone other than the person responsible for reconciling the bank account make deposits, make withdrawals and sign checks; 
  2. Have checks countersigned; 
  3. Immediately stamp all incoming checks “for deposit only”; 
  4. Segregate duties for inventory management, cash receipts, vendor approval, purchase order approval and payments, oversight of blank check stock, retail checks and credit card receipts; 
  5. Require dual authorization of wire transfers. 

Of course, there are other recommendations that we would be glad to discuss you.

The most obvious method of transferring risk of loss would be in the form of a crime insurance policy. Crime policies, however, are a tricky thing to understand. The key here is to understand exactly what constitutes an occurrence. An occurrence is defined as all losses caused by, or involving, one or more employee(s). The result(s) of a single act or a series of acts is considered one occurrence, including and employee acting alone or in collusion with another. So, this means that a repeated event is a single act according to insurance. I recently witnessed a case where an employee stole more than $300,000 of brass and copper fittings and sold them as scrap for pennies on the dollar. Do you believe the employer was happy with his $5,000 coverage limit?

When purchasing crime coverage, there are many angles and coverage types that must be considered.  The offering of crime coverage is very broad and may be extended to include First and Third Party Employee Dishonest Acts,  Computer Crime, Funds Transfer Fraud, ERISA Fidelity, and Forgery & Alteration just to name a few.

So, just how expensive is this coverage? Well, that depends upon the security controls and processes you have in place to mitigate loss, but entry level premiums start as low as $800 per year with $250,000 of coverage.  If you are thinking that is a lot of money then just consider the financial impact a loss of $300,000 would have on your cash flow.  It is also important to remember that insurance underwriters make a judgment decision on the security controls during the application process. If you would like to obtain the best rate possible it would be helpful to have a discussion with one of our insurance representatives and put into place proper controls to aid in pricing.


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Forgery and Alteration

This coverage will pay for loss resulting from forgery or alteration of, on or in any check, draft, promissory note, or similar written promise, order or direction to pay a sum certain in money, made by or drawn upon by you, or made or drawn by one acting as your agent or claiming to have been so made or drawn.

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Funds Transfer Fraud

We will pay for loss of funds resulting directly from a fraudulent instruction directing a financial institution to transfer, pay or deliver funds from your transfer account.

Claim scenario: Unauthorized Instruction to Transfer Funds

I just read an interesting case in which an insured, who operates within the continental United States, received an email from his well known supplier in another country, stating that instead of transferring payment to the usual account payment should be transferred to a different account. The email received was from the same email address used by the supplier in previous communications. The insured responds to the email requesting his contact to please send these instructions formally by letter, signed and sealed. The contact provides the letter, with the same signature, letterhead and seal as always and sends this letter scanned by email to the insured. The insured proceeds then to transfer the payment to the new account. The insured later learns that the account does not correspond to his suppliers and that somehow his supplier’s IT department was hacked and the email and letters received were fraudulent and did not originate from the supplier but from someone else. By this time, the money wired from the insured to the fraudulent account had been withdrawn. The question posed is would this be covered under the crime policy?

 In reviewing the crime policy that insures against theft, disappearance and destruction, we see that there an exclusion for loss by transfer or surrender of property on the basis of unauthorized instructions, which is what the insured did without realizing it. However, coverage may have been available to insure against computer and funds transfer fraud which is includes the loss of money, securities or other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises to a person or place outside the premises. In this situation the thief used a computer to instruct the insured to send the money to the thief and not the supplier. Speak with your insurance agent in regards to the valuable coverage or contact a McMichael Insurance Agency professional.

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Money and Securities

This coverage form will pay for loss of Money and Securities used in your business while at a bank or savings institution.  The loss must occur within your living quarters or the living quarters of your partners or an employee having use and custody of the property, at the described premises, or in transit between any of these places, resulting directly from the theft, disappearance or destruction of the property.

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Welfare and Pension Plan ERISA Compliance

The Pension Reform Act of 1974 states that the fiduciaries of a pension or profit sharing fund are required to post a bond for 10% of the amount of funds handled.  This form brings the fund into compliance with that required of the Employee Retirement Income Security Act.