While the holiday season is the most profitable time for retailers, the unfortunate reality is that it is also the most prevalent time of the year for employee theft.
Increased store traffic, management’s attention on keeping stock available, and the barrage of seasonal employees create an environment ripe for crimes of opportunity. According to the Centre for Retail Research, U.S. Retailers' losses from employee theft last year were in excess of $18.4 billion.
Retailers usually focus their efforts on reviewing and updating their security policies and ensuring their employees are properly trained and aware that the company will prosecute any employee theft. However, they shouldn’t stop there. Retailers can protect themselves from potentially exorbitant losses with proper fidelity insurance.
Most large retailers have fidelity policies, yet each year many sophisticated companies leave millions of dollars of fidelity insurance assets untapped. Most of these insurance assets remained untapped because the retailer was unaware it had coverage for the loss; the retailer didn't understand the impact of certain provisions in the policies; or the retailer failed to properly file a claim or abide by other conditions in the policies.
What Losses Are Covered Under Fidelity Policies?
Fidelity-insurance policies cover loss of money, securities, or inventory resulting from crime to the company. Basic fidelity-insurance coverage protects against employee dishonesty, theft, disappearance and destruction, embezzlement, forgery or alteration, robbery, safe burglary, computer fraud, counterfeit money orders and currency, credit card forgery, and other criminal acts.
Liabilities covered by fidelity insurance usually fall into two main categories: (1) Employee Dishonesty Coverage—pays for losses caused by dishonest acts of your employees such as embezzlement, forgery or alteration, fraud and theft; and (2) Money and Securities Coverage—pays for money and securities taken by burglary, robbery, theft, disappearance and destruction.
Fidelity policies also may include broad coverage grants for investigation costs or specific endorsements granting coverage for these costs. Costs to investigate losses and substantiate fidelity claims can be expensive for retailers, so it is beneficial to understand what, if any, investigation cost coverage you have and if you lack investigation cost coverage to consider speaking with your broker to purchase the coverage.
Provisions in Fidelity Policies Every Retailer Should Understand
Fidelity policies cover losses for employee dishonesty, but the definition of "employee" varies substantially between policies. Some policies contain broad definitions of employees that include salaried and hourly employees, directors and officers, consultants, check processors, and temporary and seasonal workers including employees provided by employment contractors or temp agencies.
Most fidelity policies’ definition of "employee," however, is much narrower and may cover only salaried employees the company compensated, directly controlled, and had direct authority to hire and fire. Retailers should review the definition in their own fidelity policy and ensure that it captures all employees it wants covered, paying specific attention to how seasonal and temporary workers are treated.
If your policy does not cover seasonal and temporary workers or any other individual necessary for your operations, prior to the discovery of a loss you can still talk to your broker and add an endorsement to broaden the definition of employee. Often, the increase in premium for these endorsements is minimal.
Most fidelity policies are triggered by the "discovery" of a loss. This can impact which policy must respond to the loss, as well as the time the policyholder's obligation to provide notice to its insurance company arises.
Some policies deem discovery to have taken place on the date the retailer becomes aware of facts that would lead a reasonable person to assume a loss had occurred. Other policies deem discovery to have taken place on the date the retailer learned an employee had committed a "dishonest act." Who within the company that must be made aware of the loss before the policy is triggered also varies from policy to policy.
The typical "cancellation" or "termination" clause in a fidelity policy provides that coverage for an employee is terminated as soon as the retailer learns of any dishonest or fraudulent act committed by the employee, whether the act was committed while in the employment of the insured or otherwise and regardless of whether the type of dishonesty is covered by the insurance. Retailers need to take heed of this provision when hiring employees, when reprimanding employees, and when learning of any dishonest or fraudulent act.
For example, if a retailer conducts a background check prior to hiring and discovers the potential employee passed bad checks 10 years ago but hires the employee anyway, the retailer may very well not be covered if that particular employee ends up stealing from the company. Similarly, if a longtime employee makes a minor mistake that could be deemed a dishonest act, i.e. not paying for a lunch under the honor system in the employee lunch room, and the company merely issues a reprimand based on years of service, again it is possible that losses caused by that particular employee will no longer be covered under your fidelity coverage. If the same employee later conspires to mastermind a theft ring depleting your inventory, you may not have coverage available.
Simply put, what you know about your employees may cause you to lose coverage. Retailers need to understand the parameters of the cancellation clauses in their fidelity policies and when hiring or keeping employees that have committed dishonest or fraudulent acts, no matter how small, retailers should notify their insurance company and ask whether the insurer would be willing to continue to cover the employee through an endorsement. If the insurance company refuses, the retailer should carefully consider whether it is willing to take the risk or whether it should terminate the employee.
How Retailers Can Maximize Their Fidelity Coverage Following the Discovery of Employee Theft
Once you have determined that an employee theft has occurred, it is essential to follow four simple steps to maximize your coverage.
First, immediately notify your fidelity carrier in accordance with the procedure and deadlines in the policy. Notice requirements vary among policies—some policies require notice in as little as 30 days after the discovery of a loss and in some jurisdictions failure to abide by notice provisions may bar all coverage.
Second, review the investigation-cost coverage under your policy and tailor your investigation to obtain the full benefit of your insurance assets. Even if your fidelity policy does not explicitly provide coverage for investigation costs, if your investigation is tailored properly some costs may be recovered under a standard "recovery clause" found in most fidelity policies (i.e., you tailor your investigation to obtain recovery and determine the scope and extent of the loss).
Third, fidelity policies usually contain strict proof-of-loss provisions that require a policyholder to swear under oath and provide details and documentation of the loss within a specific period of time, often within 120 days. In some jurisdictions untimely filing of the proof of loss can result in a bar of all coverage, and policyholders need to carefully track proof-of-loss deadlines in their policies.
Fourth, reach out to experienced coverage counsel for large or complicated losses. Experienced coverage counsel can assist you in reviewing your rights under the insurance policy, navigating the policy traps and exclusions, tailoring your investigation plan, and filing your proof of loss in a way that maximizes recovery and minimizes the risk of litigation.
If you take the time to understand your fidelity coverage and reach out to experienced coverage counsel when needed, you can maximize your insurance assets to avoid employee theft dissipating your seasonal profits.
About the Authors:
Selena Linde and Michael Sharkey are partners at law firm Perkins Coie, practicing in the firm’s Retail & Consumer Products industry group and Insurance Coverage practice. They can be reached at email@example.com and firstname.lastname@example.org, respectively.