Employee Theft Coverage
Employee theft coverage, as its name suggests, protects businesses against property thefts committed by employees. It is also called employee dishonesty coverage. Employee theft coverage may be written alone or in conjunction with other crime coverages, such as Computer Fraud Coverage, under a commercial crime policy.
Crime coverage is a type of commercial property insurance. Many insurers that provide crime coverages utilize standard ISO crime policy forms. Others have developed their own crime forms. Insurers' crime forms are often enhanced versions of the ISO forms.
Immediate Versus Delayed Discovery
Many employee thefts are discovered shortly after they occur. An employee of yours breaks into your office late one night by smashing an exterior window. The employee then steals a computer. When you arrive at your office the next morning you immediately notice the broken glass and the missing computer.
Other crimes are not discovered until long after they have occurred. For example, an employee embezzles funds from your company over an eight-month period. You don't discover the loss until a year after she has left your employment. The worker was able to conceal her actions because she was familiar with your company's internal controls (or the lack thereof).
Loss Sustained Versus Discovery
Crime policies may apply on either a discovery or a loss sustained basis. A loss sustained policy resembles an occurrence liability policy. It covers loss resulting from an occurrence that takes place during the policy period. Thefts that occur before the policy begins or after it expires are not covered.
A discovery policy is similar to a claims-made liability policy. It covers loss resulting from an occurrence that takes place at any time if the loss is discovered during the policy period. Employers should think twice before switching from a discovery to a loss sustained form. If a loss occurred during the period of the discovery policy but is discovered during the loss sustained policy, the loss will not be covered.
Employee theft coverage applies to loss or damage to money, securities or other property that results from theft committed by an employee. Coverage applies even if you can't identify a specific employee who committed the theft. Moreover, a loss is covered whether an employee perpetrated the theft alone or colluded with other people.
For the purposes of employee dishonesty coverage, "theft" includes forgery. Other property means property besides money or securities. However, other property does not include electronic data or computer programs. Here are some examples of losses that would likely be covered under employee dishonesty insurance:
- The inventory manager at a large restaurant steals pricey food items. He hides the thefts by fudging the inventory records.
- A sales employee conspires with a dishonest vendor. The vendor pads his invoices and splits the over-payments with the employee.
- A payroll employee engages in check tampering. She alters paychecks on behalf of two co-workers, increasing the amounts paid by small amounts each week. The co-workers split the extra cash with the payroll worker.
Losses Not Covered
Many employee dishonesty policies contain the exclusions described below. Other exclusions may apply as well.
- Acts by Principals Theft committed by you or your partners, directors or representatives (other than an employee). Company owners and principals (like directors) are not employees. Thus, thefts committed by them are not covered.
- Legal Expenses Fees or expenses related to any legal action, such as a lawsuit
- Inventory Shortages Shortages of inventory if proof of the loss is based solely on an inventory or profit and loss calculation. However, a loss may be covered if you can provide separate evidence of the loss. An example is a video of an employee stealing inventory.
- Trading Losses Losses resulting from trading (due to poor investments decisions etc.)
- Indirect Loss Loss of income you could have earned by investing money, securities or other property if the loss had not occurred.
- Warehouse Receipt Loss resulting from fraud involving a warehouse receipt. A warehouse receipt is a document verifying that the owner of the property has title to it.
Other Important Features
Crime policies include unique provisions not found in other types of policies. Some of these are outlined below.
- Cancellation of Coverage for a Dishonest Employee: This provision automatically cancels coverage for any employee who has committed a dishonest act once you become aware of it. That is, once you discover that an employee has stolen something, you are not covered for any subsequent thefts committed by that employee.
- Discovery Period: Discovery policies automatically include a 60-day extended period to discover loss. This means the policy covers losses that occur before your policy expires if they are discovered within the first 60 days after expiration. If the loss is incurred by an employee benefit plan that is named on the policy, the discovery period is one year. A loss sustained policy contains a discovery period that applies if your policy is canceled. The policy covers loss you sustained before the policy was canceled, but only if you discover the loss within one year of the cancellation date. The discovery period terminates if you replace your canceled policy with a new crime policy.
- Definition of Employee: The definition of the term employee is rather lengthy. It includes a natural person who is in your service or who was in your service within the last 30 days. A natural person is a human (not a corporation).
- Meaning of Occurrence: The limit under a crime policy applies to each occurrence. With regard to employee theft coverage, this term means a single act by an employee or all acts (including a series of acts) committed by the same employee. Thus, two acts of embezzlement committed by one employee would likely constitute a single occurrence, not two separate occurrences.
An alternative to employee theft coverage under a crime policy is a fidelity bond. A fidelity bond affords the same type of coverage as the employee theft insurance described above. However, a fidelity bond involves three parties: the obligee (you, the party being protected), the principal (employee being bonded) and the surety (company providing the protection). Employee theft coverage provided under an insurance policy involves only two parties, you and the insurer.