Coverage Concerns

Employee theft

Sharp increase emphasizes the need for fidelity insurance

By Roy C. McCormick

The manager of an automobile dealership is indicted for embezzling almost half a million dollars in less than a year. The owner is shocked because he had always respected and relied on this employee.

A university accounting professor, who also serves as the treasurer of a dog club, is arrested and charged with embezzling more than $100,000 from the club. She is accused of writing 70 checks to herself from the operating fund. It appears that she needed the money for her online gambling addiction.

The taking of money is by far the most serious aspect of the fidelity problem; however, retailers and wholesalers often face the threat of loss of inventory, especially during a major holiday season. Although most of us associate such loss with the theft of items by customers, the most serious incidents of this type are perpetrated by employees, either individually or as a group.

Collusion by employees demonstrates the need for high-limits fidelity insurance. Inventory loss, which occurs most often in warehouse facilities, can be financially crippling without sound insurance. Unfortunately, work in warehouses is often detached from the overall business activity and often is relatively unsupervised by company officials.

Trusted, largely unsupervised employees can cook up elaborate schemes to steal and dispose of large quantities of equipment and merchandise for their own gain. Such crimes are easy to commit because the employees usually have company trucks at their disposal. Undetected over a long period, the loss will continue to mount.

It is possible that the number of criminal acts committed by employees in the workplace will continue to mount in light of higher taxes, the escalating cost of health insurance, and the accumulation of heavy credit card debt. Consequently, some employees who might otherwise not commit offenses might begin to steal from their employers. (Let’s hope it’s a small number!)

Preventive measures

A combination of loss prevention measures and sound fidelity insurance is essential for effective protection of an organization’s money and inventory.

Background checks are important, especially for new and prospective employees who work as cashiers, bookkeepers, purchasers, warehouse workers and the like. Skilled investigators are trained to conduct inquiries without creating legal problems over invasion of privacy. In light of the trend in losses where such background checks have not been carried out, it becomes obvious that this type of checking is essential.

Studies show that shoplifting by outsiders has been reduced through the introduction of high-tech security measures. Unfortunately, employee theft has gone up since the early 1990s. Embezzlement can be minimized through the checking of credit and debit card sales and receipts, as well as supply and equipment purchase records; through the auditing of books; and through the use of security cameras, including those connected to cash register monitoring systems.

In addition, having sound fidelity insurance is crucial. Coverage for large and medium-sized businesses, in particular, takes into account current assets and gross sales and income, incorporating them in a widely used formula developed by the Surety Association of America and available through insurance companies.

A businessowners policy designed for smaller businesses and other organizations not only provides essential property coverage for structures and contents, but also includes the option for “built-in” fidelity coverage. This option, unlike an endorsement, helps an unsophisticated buyer recognize the exposure.


Agents and brokers who provide property insurance for both large and small firms should call attention to the employee theft exposure and stress the importance of obtaining insurance against it. In addition, collusion among employees makes clear the need for fixing employee dishonesty coverage limits at a high level.

Employee dishonesty coverage limits should be increased in many instances. The need is similar to that for raising limits of general liability insurance in light of today’s legal climate, and the need for adjusting property insurance limits when warranted. *

The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.