Ordinary property insurance strictly limits coverage for crime. It covers theft of equipment and goods by burglars but not inside jobs--fraud and theft by employees, which can go undetected for years and total in the millions. Property insurance also doesn't cover mysterious disappearance of expensive equipment; there has to be a break-in. And it excludes coverage for stolen money or securities. If a hacker gets into your computer system and transfers $500,000 to himself, you won't be covered.
Distribution businesses are particularly vulnerable to embezzlement. A well-positioned employee can create a phony client in the database and make it look like the goods were sold, when the money really went to him or her. A clever crook who uncovers the weakness in your financial controls often can get away with misappropriation for years.
Ironically, it's the highly trusted employee who can cause the biggest damage--good old Bob or Sally, who's been there for years, knows how to work the system and never takes a vacation. Anyone who has access to valuable company assets, from the file clerk to the CEO, can potentially steal them.
Among others, supermarkets and retail businesses offer crooks many targets. They have much cash on hand, tempting cashiers who are usually the lowest-paid workers. Robbery, safe burglary and inventory theft are substantial risks. Dishonest employees may purloin customers' credit-card numbers. Computer systems and the Internet further increase a company's vulnerability to fraud and theft by both insiders and outsiders.
Of course, financial institutions are tempting targets too.
Even the best-run companies aren't immune to the rising tide of fraud. The American Management Association has estimated that up to 20 percent of business failures are caused by employee dishonesty; the U.S. Small Business Administration says its 30 percent to 40 percent.
To be protected, you need a crime insurance policy, which covers employee dishonesty, fraud, embezzlement, forgery, robbery, safe burglary, computer fraud, wire-transfer fraud, counterfeiting, and theft of money and securities. The key is to purchase enough coverage, of the right kind, while taking a big enough deductible to make it affordable. Crime insurance is meant to cover the big losses that really hurt.
THE HOWS AND WHATS
There are two basic types of crime policies: "discovery" and "loss sustained." A loss sustained policy, the older type, requires the loss to occur and be discovered during the policy period, which is typically one year. So if an employee embezzles funds over eight years and is caught in year eight, you may be covered for only the theft that took place while the current policy was in force.
In contrast, the newer discovery policy covers any losses discovered during the policy period, even if they took place 10 years ago. It's usually well worth paying about 15 percent more for this broader coverage. With a discovery policy, you can shop around and change insurers without creating coverage gaps. With the loss sustained policy, you're locked into staying with the same insurance company because, once you switch, the new carrier won't go back and cover old losses.
Either type of policy can be extended, for an extra premium, to cover the cost to restore your computer system if it's damaged by a virus.
Premiums are based on the number of employees who handle money. Class 1 employees include messengers, collectors and accountants; class 2 employees include other clerical staff.
Rates are also based on how good a risk your company is. Especially for large accounts, the underwriter will want to meet the controller and chief financial officer and learn how the company issues and receives checks, maintains its vendor list, enforces accounting procedures and keeps its computers secure. Publicly held companies can show the underwriter their Sarbanes-Oxley report, which requires documentation of financial controls. If the underwriter sees serious deficiencies, you'll probably be required to correct them before you're insured.
The amount of crime insurance you need depends on the size of your company and its exposure. A big company might have $10 million of coverage with a $500,000 or $1 million deductible, while a small business might have $100,000 of coverage and a $1,000 deductible.
(While crime coverage is optional, all employers with a pension plan are required by ERISA to post a fidelity bond of $500,000 or $1 million, depending on their size. The so-called ERISA bond can be included in the crime policy, and it makes sense to buy more than the government-required minimum since the additional premium is small.)
Big companies get more free services from the insurer, which will often send a forensic accountant to hold seminars for your financial staff. Smaller companies will get a brochure.
Compared to big-ticket items like general liability and workers' compensation insurance, crime insurance is inexpensive. It's widely available, but relatively few insurers underwrite big accounts that need multimillion-dollar limits. Your broker may need to arrange separate coverage with one of these major players. Smaller companies can usually have their crime coverage appended to their basic policy.
Crime is as old as mankind, but today more fraudsters find it easier and more profitable to steal with a keyboard than a gun. Adequate crime insurance is a necessity.
HARRY SOEDARPO is an insurance broker and assistant vice president with E.G. Bowman Company Inc., a full-service commercial insurance brokerage in New York City.
April 1, 2008
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