While the holiday season is the most profitable time forretailers, the unfortunate reality is that it is also the mostprevalent time of the year for employee theft.

Increased store traffic, management's attention on keeping stockavailable, and the barrage of seasonal employees create anenvironment ripe for crimes of opportunity. According to theCentre for Retail Research, U.S. Retailers' losses fromemployee theft last year were in excess of $18.4 billion.

Retailers usually focus their efforts on reviewing and updatingtheir security policies and ensuring their employees are properlytrained and aware that the company will prosecute any employeetheft. However, they shouldn't stop there. Retailers can protectthemselves from potentially exorbitant losses with proper fidelityinsurance.

Most large retailers have fidelity policies, yet each year manysophisticated companies leave millions of dollars of fidelityinsurance assets untapped. Most of these insurance assetsremained untapped because the retailer was unaware it had coveragefor the loss; the retailer didn't understand the impact of certainprovisions in the policies; or the retailer failed to properly filea claim or abide by other conditions in the policies.

What Losses Are Covered Under FidelityPolicies?

Fidelity-insurance policies cover loss of money, securities, orinventory resulting from crime to the company. Basicfidelity-insurance coverage protects against employee dishonesty,theft, disappearance and destruction, embezzlement, forgery oralteration, robbery, safe burglary, computer fraud, counterfeitmoney orders and currency, credit card forgery, and other criminalacts.

Liabilities covered by fidelity insurance usually fall into twomain categories: (1) Employee Dishonesty Coverage—pays for lossescaused by dishonest acts of your employees such as embezzlement,forgery or alteration, fraud and theft; and (2) Money andSecurities Coverage—pays for money and securities taken byburglary, robbery, theft, disappearance and destruction.

Fidelity policies also may include broad coverage grants forinvestigation costs or specific endorsements granting coverage forthese costs. Costs to investigate losses and substantiate fidelityclaims can be expensive for retailers, so it is beneficial tounderstand what, if any, investigation cost coverage you have andif you lack investigation cost coverage to consider speaking withyour broker to purchase the coverage.

Provisions in Fidelity Policies Every Retailer ShouldUnderstand

Fidelity policies cover losses for employee dishonesty, but thedefinition of “employee” varies substantially between policies.Some policies contain broad definitions of employees that includesalaried and hourly employees, directors and officers, consultants,check processors, and temporary and seasonal workers includingemployees provided by employment contractors or tempagencies.

Most fidelity policies' definition of “employee,” however, ismuch narrower and may cover only salaried employees the companycompensated, directly controlled, and had direct authority to hireand fire. Retailers should review the definition in their ownfidelity policy and ensure that it captures all employees it wantscovered, paying specific attention to how seasonal and temporaryworkers are treated.

If your policy does not cover seasonal and temporary workers orany other individual necessary for your operations, prior to thediscovery of a loss you can still talk to your broker and add anendorsement to broaden the definition of employee. Often, theincrease in premium for these endorsements is minimal.

Most fidelity policies are triggered by the “discovery” of aloss. This can impact which policy must respond to the loss, aswell as the time the policyholder's obligation to provide notice toits insurance company arises.

Some policies deem discovery to have taken place on the date theretailer becomes aware of facts that would lead a reasonable personto assume a loss had occurred. Other policies deem discovery tohave taken place on the date the retailer learned an employee hadcommitted a “dishonest act.” Who within the company that must bemade aware of the loss before the policy is triggered also variesfrom policy to policy.

The typical “cancellation” or “termination” clause in a fidelitypolicy provides that coverage for an employee is terminated as soonas the retailer learns of any dishonest or fraudulent act committedby the employee, whether the act was committed while in theemployment of the insured or otherwise and regardless of whetherthe type of dishonesty is covered by the insurance. Retailers needto take heed of this provision when hiring employees, whenreprimanding employees, and when learning of any dishonest orfraudulent act.

For example, if a retailer conducts a background check prior tohiring and discovers the potential employee passed bad checks 10years ago but hires the employee anyway, the retailer may very wellnot be covered if that particular employee ends up stealing fromthe company. Similarly, if a longtime employee makes a minormistake that could be deemed a dishonest act, i.e. not paying for alunch under the honor system in the employee lunch room, and thecompany merely issues a reprimand based on years of service, againit is possible that losses caused by that particular employee willno longer be covered under your fidelity coverage. If the sameemployee later conspires to mastermind a theft ring depleting yourinventory, you may not have coverage available.

Simply put, what you know about your employees may cause you tolose coverage. Retailers need to understand the parameters of thecancellation clauses in their fidelity policies and when hiring orkeeping employees that have committed dishonest or fraudulent acts,no matter how small, retailers should notify their insurancecompany and ask whether the insurer would be willing to continue tocover the employee through an endorsement. If the insurance companyrefuses, the retailer should carefully consider whether it iswilling to take the risk or whether it should terminate theemployee.

How Retailers Can Maximize Their Fidelity CoverageFollowing the Discovery of Employee Theft

Once you have determined that an employee theft has occurred, itis essential to follow four simple steps to maximize yourcoverage.

First, immediately notify your fidelity carrier in accordancewith the procedure and deadlines in the policy. Notice requirementsvary among policies—some policies require notice in as little as 30days after the discovery of a loss and in some jurisdictionsfailure to abide by notice provisions may bar all coverage.

Second, review the investigation-cost coverage under your policyand tailor your investigation to obtain the full benefit of yourinsurance assets. Even if your fidelity policy does not explicitlyprovide coverage for investigation costs, if your investigation istailored properly some costs may be recovered under a standard“recovery clause” found in most fidelity policies (i.e., you tailoryour investigation to obtain recovery and determine the scope andextent of the loss).

Third, fidelity policies usually contain strict proof-of-lossprovisions that require a policyholder to swear under oath andprovide details and documentation of the loss within a specificperiod of time, often within 120 days. In some jurisdictionsuntimely filing of the proof of loss can result in a bar of allcoverage, and policyholders need to carefully track proof-of-lossdeadlines in their policies.

Fourth, reach out to experienced coverage counsel for large orcomplicated losses. Experienced coverage counsel can assist you inreviewing your rights under the insurance policy, navigating thepolicy traps and exclusions, tailoring your investigation plan, andfiling your proof of loss in a way that maximizes recovery andminimizes the risk of litigation.

If you take the time to understand your fidelity coverage andreach out to experienced coverage counsel when needed, you canmaximize your insurance assets to avoid employee theft dissipatingyour seasonal profits.

About the Authors:

Selena Lindeand MichaelSharkey are partners at law firm Perkins Coie, practicing inthe firm's Retail & Consumer Products industry group andInsurance Coverage practice. They can be reached at [email protected] and[email protected],respectively.