There are a number of common instances where no coverage may be provided under an employee dishonesty coverage form. This Special Report will discuss a few of these instances. You will want to consult with counsel as part of your determination and application of coverages.
Most employee dishonesty coverage forms include the following concepts:
• Coverage is provided for acts that occur within the policy period.
• A financial loss has to be sustained by the insured.
• A financial benefit, other than salaries, etc., must be obtained by the perpetrator.
• The coverage is cancelled as to an employee upon discovery of dishonest acts committed by that employee.
These factors all need to be considered, and claims that fail to meet these tests may not be covered under your policy of insurance.
It is important to know the inception of your company’s employee dishonesty coverage. Any dishonest acts committed by employees prior to that date are not covered. While a relatively simple concept, due to the nature of employee theft losses, identifying the exact date as to when a loss occurred can be difficult. As an example, assume that on June 1, 2010, an employee steals $500 cash that was brought in by Customer A to pay off an account. In order to cover the theft, on August 1,
2010, the employee takes a $500 check from Customer B and applies it to Customer A’s account. If a new insurance company’s policy began on July 1, 2010, this loss would not be covered under this new policy. The actual theft of money occurred on June 1, 2010, and the act that occurred on August 1, 2010 (the current policy period) is merely covering up the actual theft. A careful review of transactions occurring around the inception of a new insurance company’s policy is necessary in order to identify the actual date of theft, and whether the losses occurred during that policy period.
The standard ISO employee dishonesty form specifically excludes dishonest acts in which the financial gain to the employee is in the form of increased salaries, bonuses, commissions, or other employee benefits. To illustrate this, consider an example of a sales manager who is paid a percentage of gross profit from a business. It is subsequently discovered that this sales manager was altering inventory records, resulting in the cost of sales recorded at less than actual and, therefore, overstating gross profit. As a result, the sales manager received commission checks in excess of what he was entitled to, thus giving rise to the claim. Since the financial benefit gained by the sales manager was in the form of higher commissions, this loss might not be covered based on the policy language excluding losses wherein the only financial benefit is in the form of increased commissions. A careful review of the policy and an understanding of the individual situation would dictate the actual coverage decision.
Another criteria necessary for an employee dishonesty loss to be covered is that an economic loss must occur to the insured. As basic as this sounds, there are instances where an economic loss has not been incurred by the insured. One situation is when employees do not follow corporate policy. An example would be an employee who authorizes employee discounts for friends and family members who are not employees. In this particular example, the discounted price may still provide a profit margin to the insured, and assuming that no inventory shortages were created by these sales, no financial loss occurred to the insured. In fact, a financial benefit may have occurred, despite the fact that corporate policy was broken, if the sales would not otherwise have occurred.
Most employee dishonesty policies indicate that coverage ceases for an employee immediately upon discovery of a dishonest act committed by that employee. We have encountered instances where an employee has been caught performing a dishonest act, and the employer has chosen to resolve the situation without presenting an insurance claim. After a period of time, the same employee perpetrates another theft against the insured, and for the second theft a claim is presented. Since a dishonest act committed by that employee had been discovered previously, coverage might have been canceled for that employee prior to the subsequent occurrence.
These are just a few examples of situations wherein employee theft may not be covered under an employee dishonesty form. It is important that you read your company’s policy, gain an understanding of the claim circumstances and consult with counsel to make a proper determination as to whether an employee dishonesty loss is covered. Once the proper coverage determination is made, you can then proceed with the verification of the actual loss sustained.
Click on the link below to view some examples of Employee dishonesty claims.
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