By Christopher Giovino, Partner, Dempsey Partners,LLC

The incidence of occupational crime—theft or fraud perpetratedby an employee—is on the rise. These crimes generally spike aroundeconomic downturns, such as the conditions of the past severalyears.

Occupational fraud now accounts for 5 percent of gross revenuesfor all businesses, according to the Assoc. of Certified FraudExaminers. The median loss in occupational fraud events is$140,000; one in five cases involved losses of $1 million ormore.

What many find surprising, however, is that all types ofbusinesses and non-profit organizations—regardless of size,industry, employee education and skill level—are equally vulnerableto such incidents. And perpetrators range from hourly workers tosenior leadership, including top executives.

Read related: “Top5 Highest and Lowest Risk Cities in the World.”

For agents and brokers, understanding the nuances ofoccupational crime exposures and events can add significantly tothe value they bring to client relationships. Indeed, superiorclaims service can help strengthen client relationships, generatereferrals and build their business.

The producer's work on crime exposures should start well beforea loss. Take time with your client to review their crime orfidelity insurance policy. Although crime insurance provides themost significant financial remedy for occupational crime and fraudlosses, manybusinesses learn too late that they are woefullyunder-insured for such exposures.

Pre-Loss Preparation

Make sure clients review the adequacy of coverage, limits, andthe presence of “cost/fee coverage,” which can pay for outsideproviders to help investigate a crime. Exercises to quantifyworst-case scenarios for crime losses, such as those for businessinterruption, can help clients determine appropriate crimeinsurance coverage limits.

The first step if a client suspects occupational crime or fraudis to contact the local police if anything appears even remotelydangerous. Absent such exigencies, they might do the following:

• Check their crime or fidelity insurance policy for claimreporting requirements and critical dates
• Conduct an initial investigation
• Provide proper notice to crime and property insurers
• Observe insurance policy time requirements for filing “proof ofloss”
• Note the time to file suit against an insurance carrier fornon-payment of a loss
• Conduct a more comprehensive internal investigation. Inthe process, don't under-estimate the opportunity to seekcooperation of any employees suspected to have been involved in thecrime.

At the same time, clients should work with their humanresources, communications, operations, employment attorneys andoutside counsel to address potential employee issues arising fromthe crime and its eventual investigation by law enforcement.Clients also should consider civil litigation against theperpetrators.

Read related: “EmployeeTheft On The Rise In Recession.”

Loss adjustment for a crime claim typically proceeds asfollows:

• Client conducts a preliminary investigation
• Client notifies insurance company of a potential claim
• Facts are established regarding liability and quantum ofdamages
• Client files a sworn “proof of loss” with the insurer
• Insurer conducts an investigation and audit
• Client team meets with the insurer's team to reconcilepotential issues and differences that may arise with respect to theclaim
• The loss is negotiated and ultimately settled
• Subrogation may follow.

Working with Law Enforcement

Even without any exigencies, the client's leadership may wantpolice to investigate right away. Although that may be appropriatein some cases, it's not always the best course of action. Aprovision in the client's insurance policy may dictate notifyinglaw enforcement, so clients must know if they are required to filea report and refer the matter.

Once the case has been referred to law enforcement, policeinvestigators may not share much information with the client. Ifthe matter goes to a grand jury, the client will be precluded fromlearning anything from the prosecution team.

So clients need to know when to call law enforcement,as well as whom to call. Referring an investigation to thewrong agency or prosecutorial office can create all sorts ofissues. For example, an investigation or search for assets may beoutside the jurisdiction of local or state police. Thus, clientsshould try to understand the complexity and the geographic extentof the loss.

In some cases, the reach across state lines or outside thecountry dictates seeking federal assistance. The FBI, IRS,Secret Service, immigration and customs enforcement, U.S. Marshalsand U.S. Postal iInspection Service have different priorities,skill sets and capacity. The U.S. Attorneys' Offices havedifferent thresholds and influence law enforcement agencypriorities.

The client's use of forensic accounting services to augmenttheir internal investigation will be important to law enforcement;it provides a quantum of loss, witnesses, statements, evidence anda road map. A solid forensic investigation can also provide vitalleads to assets.

At some point, investigators will need bank statements and otherfinancial records. Law enforcement will likely get them from searchwarrants and grand jury subpoenas. These can help establish theexistence and amount of loss, including an examination of vendorbusiness records, employee bank accounts, and shell companydocuments.

Although losses from fraud occur less frequently than those fromproperty damage, your clients should consider them inevitable andprepare accordingly.