Commercial Crime Insurance Explained

Most assume every employee is trustworthy and won’t steal, but statistics show the opposite to be true. Numbers compiled by JW Surety Bonds indicate a shocking 95% of all businesses suffer from theft in the workplace, and the average time of fraud to detection is two years!

So what should you do to protect your business from something that is almost guaranteed to happen?

Enter Crime Insurance. Crime insurance is designed to protect the assets of an organization. A crime policy specifically protects what matters most… your balance sheet.

This guide will walk you through the five types of crime coverage your business should consider in your overall risk management strategy.

It is important to keep in mind that a typical crime insurance policy is written on a “named perils” basis. This means that the cause of the loss MUST fall within one of the sections of the policy for coverage to apply.

This is very different than a “special perils” or “all-risk” basis that most commercial policies are written on, where losses are covered unless specifically excluded.

This is why it is extremely important to think through the areas subject to the largest or most frequent financial losses and make sure the policy will respond to how you intend. For example, it’s unlikely you would include assault (CC 266) under your named perils, but fraud should be included under your named perils.

1. Employee Dishonesty

This can also be referred to as “employee theft”. This would cover any loss or damage: money, securities, or other property caused by employee dishonesty, theft or forgery. The word “employee” is defined very specifically in the policy. It can cover full-time, part-time, independent contractors, volunteers, etc.

It does not cover owners, business partners, and even some top managers. So you must take care to ensure the word “employee” encompasses the types of workers you have in your organization.

If you have an employer-sponsored retirement, pension, or health plan, you can also find Employee Retirement Income Security Act (ERISA) coverage under the Employee Dishonesty section of a crime policy.

The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to protect individuals in these plans for a limit of at least 10% of the plan balance.

A critical, and often overlooked step, is to make sure the plan is added as an Additional Insured on your crime policy, otherwise, coverage may not apply. You can also purchase an ERISA bond separately, but if you already have crime coverage, you can typically add the plan to the policy without issue. Plus with a crime policy you also typically have broader coverage for other types of theft as outlined below.

2. Money and Securities

Money and securities coverage applies to non-employee thefts and covers the loss of money or securities from theft, disappearance, or destruction. The policy usually specifies different limits for money and securities located “inside” or “outside” the premises.

“Inside the premises” includes money or securities located at a business location specified in the policy. While “outside the premises” covers money or securities away for your location, for example in transit, at an expo, fundraiser, etc.

3. Money Orders and Counterfeit Money

This covers the financial loss if your business erroneously accepted counterfeit money, money orders, or checks. High tech printing and scanning capabilities have increased the risk of these types of crimes. The FTC found that reports of fake checks have increased 65% over the past few years.

4. Forgery and Alteration

Forgery and Alteration coverage would apply if checks, promissory notes, or other promises to pay money are drawn on your account and forged by someone other than your employee. It can also provide coverage for legal fees to defend against lawsuits if you are sued for refusing to pay for a forged check.

5. Funds Transfer Fraud

This portion of the crime policy would cover losses resulting from fraudulent instructions provided to your bank by a third party that leads them to transfer funds out of your account. These can be directly caused by:

• Electronic, telephone, or fax instruction which appears to have been sent by you or an employee, but was fraudulently transmitted by someone else without your knowledge or consent.
• Written instructions you or an employee issued but were then subsequently forged or altered; or written instructions that seemed to have been issued by you or your employee, but were fraudulently issued, both without your knowledge or consent

Computer Fraud: Crime Policy or Cyber Policy?

Computer Fraud is an optional coverage you can add to your crime policy. It would protect your business from losses from the fraudulent transfer of your money, securities, or other property to a place outside your business premises or bank resulting from the use of any computer. Examples of these types of losses include:

• Fraudulent electronic funds transfer instructions sent to your bank claiming to be from you.
• More commonly seen is “Social Engineering Fraud”, also known as “Fraudulent Inducement”. This I when you or an employee is essentially tricked into voluntarily releasing funds in some way. This is often done using phishing schemes or fraudulent email messages appearing to come from legitimate sources. Usually, this is not covered and can only be added back by a separate endorsement. Without the addition of Social Engineering Coverage, the Funds Transfer Fraud coverage only applies to losses resulting from transfers made from your bank without employee involvement.

In this day and age, nearly all financial crime is committed using a computer in some way. This creates some potential coverage issues. While crime insurance will cover some computer crimes which result in financial loss, a better place to add this coverage is on the cyber policy. Most insurance agents recommend that businesses purchase cyber insurance in addition to a crime policy and ensure the other insurance clauses between the policies coordinate appropriately.

Final Thoughts and Bonus Advice

Check with your bank or financial institution on the types of fraud protection they can offer on your business account. In addition to implementing a good risk management program for your business, your bank is the next step of defense in stopping fraud on your account. The banking industry is actively and diligently working to deter fraud.

The Financial Crimes Enforcement Network (FinCEN) recently issued three COVID-19 related advisories between May and July 2020 that instruct financial institutions to “remain alert to COVID-19-related fraud by understanding the current scams and red-flag indicators that may indicate this illicit activity”.

Media Post reports that cyber fraud insurance claims are on the rise! Risk prevention, education, and training are essential components of reducing your risk of falling victim to these crimes. However, we are all human and mistakes are made. Desperate criminals out there are relying on that and waiting to strike.

Crime insurance is the best way to protect your balance sheet from the impact these losses can have on your business.