It's often easier to protect against losses from outside your business than the damage that one dishonest employee can do. You can protect yourself with fidelity guarantee insurance, meaning you're covered if an employee turns crooked. This is also known as fidelity insurance, a fidelity bond or a fidelity guarantee policy.
TL;DR (Too Long; Didn't Read)
Fidelity insurance or a fidelity bond covers you against losses caused by employees' "want of fidelity", such as committing fraud, forgery or theft against your company. If the loss is covered under the terms of the fidelity policy, the insurer reimburses you for your loss.
Employee Theft Is a Big Deal
In 2016 alone, U.S. businesses victimized by thieving employees lost an average of $1.13 million. You might notice if someone sucked that much out of your business in a single theft, but the sums are often stolen a little at a time. Theft of funds is the preferred modus operandi, followed by check fraud.
Employee theft can hit businesses of any size. Small businesses are actually more likely to be the victims, although the amounts taken are smaller than at bigger companies. Catching the thief probably won't recover the missing money because:
- Many thieves spend on entertainment or travel so there are no assets to recover.
- Thieves hide their stolen money in accounts owned by their friends or family, or they launder the money through shell companies.
- If they've bought a house or a fancy car, it may be encumbered with debt and worth little.
How a Fidelity Guarantee Policy Works
Fidelity insurance works on the same model as liability insurance or fire insurance. In this case, though, the loss is one that is caused by employee theft. Loss of property due to dishonesty, theft or fraud gets reimbursed as long as the case meets the terms of the policy.
- An individual fidelity guarantee policy covers one person for a stated amount. It's the kind of policy you might take out on your chief accountant or your CFO.
- A collective policy covers a group of named employees with a stated amount set for each individual.
- A floater policy sets limits on what the insurer will pay for one individual and a total amount for all employees named in the policy.
- A blanket policy covers categories of employees, such as bank tellers or bookkeepers.
Limits on Fidelity Coverage
A fidelity guarantee policy only kicks in under certain circumstances. Know what you're getting before you take out coverage:
- An employee must be responsible. Typically, fidelity policies don't cover theft or fraud by volunteers or subcontractors unless you request that and pay for the extra coverage.
- The loss has to relate to the employee's normal duties. A bank teller embezzling money would count, but maybe not if he held up the bank at gunpoint.
- The loss has to be the result of theft and not negligence.
- The loss has to be direct. If a staffer steals an office computer, that's a direct loss. If you lose the information on the computer and suffer a financial loss as a result, that's more indirect.
- Some policies only cover specific assets, such as money. This is often a bad option, as theft could involve property, stock or other noncash assets.
- Losses due to poor accounting aren't covered.
- Some policies only cover losses that take place while the policy was in effect. With long-running fraud schemes, that could mean the insurer only reimburses you for part of the stolen money.
Proving a Claim
Proving that your claim meets the coverage conditions can be a major undertaking. Insurers typically want evidence that your losses are caused by employees' want of fidelity and not some other cause.
- You'll have to provide proof of loss. That includes detailed information about how the theft was carried out, when and for how much.
- You may have to bring in forensic accountants to prove that the missing assets are due to employee dishonesty rather than just sloppy record keeping. Many policies provide some coverage for this added expense.
- Some policies won't kick in until there's an actual conviction.
Speed is generally important. Notify your insurer promptly and take immediate steps to recover the stolen assets if you can. Don't wait until you have all the details, though you'll probably have to provide them eventually.
- Economic Journal: What Is Fidelity Insurance and Why Do You Need It?
- USLegal: Fidelity Insurance Law and Legal Definition
- Security: Employee Theft Cost US Businesses $1.13 Million in Losses
- CTCPA: Recovering Losses From Employee Theft and Embezzlement
- RCM&D: Employee Dishonesty Insurance — Who Needs It?
- ECBM: FAQs About Fidelity Insurance Coverage
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com