Asset Recovery through Insurance

notepad-3Unlike many skimming victims our chain restaurant owner (see our last post – ‘Small Theft – Big Consequences’) was fortunate enough to have employee dishonesty insurance made available to him through a group policy provided by our RVACFE Chapter member’s restaurant management firm.  Most small concerns aren’t so lucky.  Any concern that can afford such a policy should invest in one because in the case of employee theft, it’s not a question of if, but when.  To the extent that you can, make you clients aware that asset recovery on most employee frauds is typically slim to none (the money’s usually been long spent by the time of the malefactor’s discovery) making insurance against the loss a good investment for any business.

Insurance companies offer employee dishonesty coverage, or fidelity bonds, as part of business insurance packages. If your client is so insured, s/he may be indemnified by their insurer for a loss caused by an employee’s dishonest or fraudulent acts (at least to the extent of the policy’s coverage limits). Dishonest or fraudulent acts typically are defined under these policies and bonds as acts committed with intent to:

–Cause the insured to sustain a loss; or
–Obtain a financial benefit for the employee or for any third party intended by the employee, other than her proper compensation.

Given the nature of this kind of insurance and how its marketed, it’s most likely to be available for internal fraud or theft in a business like our victim’s, although it is possible for a fiduciary of almost any kind to be bonded for her acts as a fiduciary and so for the bonding company to indemnify for the fiduciary’s actual or constructive fraud.  Employee dishonesty insurance is available either in an occurrence policy, which covers any loss caused by employee dishonesty which occurs during the policy period, or a claims made policy, which covers claims made only while the policy is in effect. Occurrence policies can be more expensive, but their advantage is that losses that occurred during the policy period, but were not discovered until after the policy period ended, can still be claimed. A tail can be purchased and added to the claims made policy so that after-discovered losses can still be claimed after the policy’s lapse, but this added expense can make the claims made policy nearly as expensive as the occurrence policy.

As with any other insurance agreement, these policies and bonds have deductibles (a reserved amount that is subtracted from the total loss claimed), policy limits (a limit to the amount the insurance company will indemnify the insured for a given loss; usually in the millions of dollars), and certain exclusions (specified facts and circumstances that are not covered). Deductibles and policy limits usually are applied per each occurrence, although some policies carry an aggregate policy limit which applies to all occurrences within the policy period. All of these combine to affect the degree to which the policy will cover a particular loss. To collect employee dishonesty benefits, as with any other type of claim, the insured will have to follow the claim procedures set forth in the policy. Generally, the insured is required to submit a sworn proof of loss claim within a specified time period, together with supporting proof of liability and documentation of the loss amount.

Submitting a timely Proof of Loss is entirely the responsibility of the insured; normally, the carrier is not responsible under the policy to conduct or assist in the investigation of the loss, nor to reimburse the insured’s investigative or legal costs in making the claim. Failure to comply with these policy conditions can result in denial of the claim (although many courts require the insurer to prove that it was prejudiced by the insured’s failure to submit a timely Proof of Loss before it will relieve the insurer of its duty under the policy to indemnify the insured for the claimed loss).  This is where the good efforts of our associate member were so valuable to her employer’s client; by assembling and organizing all the documentation related to the skimming incidents her client’s Proof of Loss report was wholly understandable and credible to the insurer, making for timely collection of the claim.  Without the insurance, none of the skimmed funds would have been recovered.

It’s important to note that most policies expressly give the insurer subrogation rights against the employee who caused the covered loss, i.e. the insurer acquires the insured’s claim(s) against the employee and can sue him or her to recover any sums paid to the insured employer under· the policy. Even in the absence of an express subrogation agreement in the policy, courts imply subrogation rights in these circumstances. Insureds are prohibited by the policy provisions from interfering with the insurer’s subrogation rights in any way at the risk of jeopardizing coverage. Therefore, if the insured seeks to settle with the employee directly, the insured must not execute any acknowledgment of settlement or release of liability with the employee or with any of her confederates unless the insurance company expressly consents.

One additional thing to be aware of is about liability insurance, the kind of insurance that indemnifies the insured against liability to a third person(s) as a result of the insured’s wrongful conduct.  If the defendant is a vicariously liable party (e.g. an employer or corporation who didn’t actually commit the act, but is legally responsible for the person who did) then his/its liability may not be intentional in nature and may not be excluded by the policy or statute. Similarly, there should be coverage if one of the theories of liability is negligence – for instance a trustee whose misconduct is alleged in the complaint to violate his statutory duty of due care, or a concern that is liable for negligently hiring a dishonest employee or negligently failing to take the precautions that would have avoided the loss. Additionally, intentional wrong has a special meaning for insurance purposes, and, as a practical matter, insurers cannot always say with certainty that the third party’s loss was intentional on the part of the insured. If there is room for doubt, the insurer may indemnify the insured for the liability rather than risk breaching its insurance contract with the insured (which can expose the insurer to even greater damages and expense).  When in doubt, file the claim and find out.

Fraud examiners, internal auditors and other assurance professionals can make a real contribution to the fraud control programs of our clients by understanding the key role insurance of all kinds can play in asset recovery.

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