Insuring Against Employee TheftApril 6, 2009
Often times we read or hear media reports involving theft of funds entrusted to the care of volunteers or employees. Frequently, not-for-profits such as fire and rescue companies, little league, soccer and other sport associations have tens of thousands of dollars stolen by one or more individuals unable to resist the temptation to divert funds when no one is looking. However, it is not just nonprofits that are the objects of such thefts. Physician practices also find themselves being victimized.
For example, “Woman Pleads Guilty to Stealing $783,000,” was the headline of a recent newspaper article detailing the theft from a local ophthalmology practice by its business manager over a 10-year period. This theft might have continued, except that the bank at which the practice maintained its account discovered certain irregularities and notified the practice. The employee was fired, subsequently pleaded guilty to charges of fraud and, according to the article, will likely receive a three-year prison term. The physicians’ in the victimized practice say they have learned their lesson, and have changed their policies and procedures as a result of the loss they suffered.
While strong internal controls, including such things as an employee code of conduct and separation of duties among employees responsible for a practice’s finances, are important, the lack or failure of such controls need not result in a severe financial loss for a practice. Although perhaps not as well known as other kinds of coverage, there is a type of insurance that is available to practices that can protect them against the sort of fraud described above. Specifically, such insurance, known as “Employee Dishonesty Coverage,” enables a practice to insure itself against and recoup financial losses it suffers as a result of employee theft. However, based upon our experience, many practices are unaware of the existence of Employee Dishonesty Coverage, and are also unaware that such coverage may be purchased at reasonable rates.
Physicians and their practices are often more concerned with Professional Liability Coverage (a/k/a Medical Malpractice Insurance) rather than General Liability (GL) Coverage. But, Professional Liability Coverage does not provide any relief when an employee steals funds from a practice. Rather, Employee Dishonesty Coverage can be added to a GL Policy.
In addition to such things as the building, fixtures, and portable equipment, additional coverage can be purchased when there is a risk of employee dishonesty. Employee Dishonesty Coverage insures against employee theft of money, securities, or property, written with a per loss limit, a per employee limit, or a per position limit. Employee Dishonesty Coverage can be one of the key coverages provided in a Commercial Crime Policy, but for purposes of this article, more frequently found in a GL Policy. Working with a team of risk management professionals and your insurance agent, a practice is likely to have a Business Owner’s Package Policy (BOP). Within the BOP, coverage can be added either by scheduling a specific employee position or having blanket coverage with a list of employees, including those having access to the practice’s finances.
When Employee Dishonesty Coverage is purchased, the insurer will often recommend loss control techniques. Loss control is a risk management technique, seeking to minimize the possibility that a loss will occur or reduce the severity of those that do occur. Therefore, the insurer may be able to assist in developing stronger internal controls by defining checks and balances, oversight, and separation of duties, as opposed to having all of the bookkeeping functions rest with one employee of the practice. In short, multiple sets of eyes and ears are better than one.
Employee Dishonesty Coverage will also contain a cooperation clause, requiring an insured to assist its insurer in providing information about a claim necessary to validate a loss, and may also involve cooperation with law enforcement. Further, as an alternative to Employee Dishonesty Coverage, some practices may find it appropriate to purchase a Fidelity Bond – an insurance product similar to Employee Dishonesty Coverage that also acts to indemnify an insured against losses caused by theft by an employee or third party, such as an independent contractor providing billing, management or accounting services to a practice.
Working together, the practice’s attorney, accountant, and insurance agent can assist in determining the type of coverage and amount of per loss limit that is reasonable for the practice in light of its income; and while fraud may not be prevented, a practice’s physicians can take comfort in knowing they have better and tighter controls, and appropriate insurance coverage in the event of a loss due to theft.