Crime Coverage

When a typical business considers either insurance or loss control to protect itself from losses, the focus is usually upon outside forces. In other words, the assumption is often that some event or some party not directly connected with the business will be the source of a loss. While this assumption works in many instances, it is a very limited and dangerous assumption.

Unfortunately losses may occur from inside a business just as easily as from outside. Ironically, a major source of loss for many businesses is their employees. Even more ironic, the more trust an employer places in a given employee, the more vulnerable that employer is to suffering a loss caused by the employee….IF that employee is dishonest. To protect itself from crooked employees, a business may need to purchase crime coverage.

A company’s exposure to theft from employees lies with workers who are responsible for handling money (and similar property) and those who have significant access to company inventory. Therefore, a company that wants to evaluate its possible expense for purchasing crime insurance as well as to determine what control measures it should create to minimize theft losses, must properly classify its employees.

Types of Employees

Employees in positions of greater trust (such as supervisors, managers and executives) usually have greater access to company assets. These workers are more expensive to insure because they can, potentially, create greater theft losses. These employees are often in a position, not only to handle money and securities; they usually handle company records concerning monetary transactions. They are also, often, in charge of benefit plans or have other fiduciary responsibilities.
 

Other employees, with non-managerial duties, can also cause problems. Consider persons, such as those in sales, product transportation and/or warehousing and supplies who have constant access to valuable company property. Because dishonest employees at this level deal with tangible items rather than money and securities, they represent a less dangerous source of loss. However, depending upon the property involved, they may also create substantial losses. Still, such employees are less expensive to insure. A business that is evaluating its need for insurance coverage and for anti-theft controls MUST make thorough consideration of their type of business.

Employee Theft Controls

Controls refer to techniques and processes that discourage theft by employees. While controls can’t fully eliminate theft; they can certainly help minimize the danger. Further, they may also assist in more quickly discovering and capturing dishonest employees. The most effective controls are those that limit theft opportunities and the use of auditing.

One important control is to thoroughly check new employees. The hiring process must include adequate references that are verified, as well as running background checks (BEFORE HIRING). Hiring workers with criminal backgrounds is a near guarantee that losses will soon occur. Such losses may not be covered since insurance companies usually exclude losses involving employees who have a documented history of dishonest behavior.

Another control is to assign distinct job duties among different employees. Responsibilities for making deposits should not be assigned to the same employees responsible for making account payments. The worker who orders inventory should be different from a worker responsible for receiving property. These workers should be different from the worker who pays for shipments. In small businesses, with few employees, such tasks can be rotated among different workers. This reduces the chance for a dishonest employee to create theft opportunities. Employees will act as checks and balances against crooked activity. Sadly there is still the chance that workers will cooperate with each other to steal property, but collusion is significantly less common than individual acts.

Other important controls involve having proper procedures for handling company check disbursements (such as use of countersignatures, stamping incoming checks “for deposit only) and inventory controls that include accurate recordkeeping (either manual or computerized) to track inventory levels. It also helps to closely monitor ordering procedures, acceptance of credit and separate approval of suppliers. Another way to exert control over possible thefts is to use qualified, independent auditors regularly. Outside auditing can quickly and accurately identify problems.

Regardless the type of business, it is important to recognize that, unfortunately, employees can be a major contributor to business losses. An insurance professional is a good source of expertise for identifying ways to protect against internal losses.

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COPYRIGHT: Insurance Publishing Plus, Inc. 2009

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