Prepare your Clients for Occupational Crime

By Christopher Giovino, Partner, Dempsey Partners, LLC

The incidence of occupational crime—theft or fraud perpetrated by an employee—is on the rise. These crimes generally spike around economic downturns, such as the conditions of the past several years.

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

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

Read related: “Top 5 Highest and Lowest Risk Cities in the World.”

For agents and brokers, understanding the nuances of occupational crime exposures and events can add significantly to the value they bring to client relationships. Indeed, superior claims service can help strengthen client relationships, generate referrals and build their business.

The producer's work on crime exposures should start well before a loss.  Take time with your client to review their crime or fidelity insurance policy. Although crime insurance provides the most significant financial remedy for occupational crime and fraud losses, manybusinesses learn too late that they are woefully under-insured for such exposures. 

Pre-Loss Preparation

Make sure clients review the adequacy of coverage, limits, and the presence of “cost/fee coverage,” which can pay for outside providers to help investigate a crime. Exercises to quantify worst-case scenarios for crime losses, such as those for business interruption, can help clients determine appropriate crime insurance coverage limits. 

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

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

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

Read related: “Employee Theft On The Rise In Recession.”

Loss adjustment for a crime claim typically proceeds as follows:

• Client conducts a preliminary investigation
• Client notifies insurance company of a potential claim
• Facts are established regarding liability and quantum of damages
• 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 reconcile potential issues and differences that may arise with respect to the claim
• The loss is negotiated and ultimately settled
• Subrogation may follow.

Working with Law Enforcement

Even without any exigencies, the client's leadership may want police to investigate right away. Although that may be appropriate in some cases, it's not always the best course of action. A provision in the client's insurance policy may dictate notifying law enforcement, so clients must know if they are required to file a report and refer the matter. 

Once the case has been referred to law enforcement, police investigators may not share much information with the client. If the matter goes to a grand jury, the client will be precluded from learning 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 the wrong agency or prosecutorial office can create all sorts of issues. For example, an investigation or search for assets may be outside the jurisdiction of local or state police. Thus, clients should try to understand the complexity and the geographic extent of the loss.   

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

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

At some point, investigators will need bank statements and other financial records. Law enforcement will likely get them from search warrants and grand jury subpoenas. These can help establish the existence and amount of loss, including an examination of vendor business records, employee bank accounts, and shell company documents. 

Although losses from fraud occur less frequently than those from property damage, your clients should consider them inevitable and prepare accordingly.