Commercial Insurance Update – What You Need to Know About Crime Insurance

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December 2005

What You Need to Know About Crime Insurance

By Jeffrey W. Cavignac, CPCU, RPLU, CRIS

If you have anything of value, it’s likely that someone will try to steal it. If you have a standard commercial property policy with a special peril coverage form, you’re protected if your business personal property as defined in the policy is stolen.

Unfortunately, the business personal property form specifically excludes the following types of property:

# Accounts Receivable # Bills

# Currency # Deeds

# Food Stamps # Evidences of Debt

# Money # Notes or Securities

In order to cover these types of property, you need separate coverage specifically for crime. It may come as no surprise to you that the people most likely to steal your property are your employees. The Association of Certified Fraud Examiners (ACFE) has estimated that the typical organization loses 6% of its annual revenues to occupational fraud. Six percent! At that rate, a firm with annual sales of $10 million would lose $600,000 a year to fraud caused by employees. “Occupational fraud, as used here, is defined as use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources and assets.”

According to the 2003 National Retail Security Survey Final Report, U.S. retailers lost over $33 billion of inventory to theft, almost half of which was caused by employees. Surveys such as this reflect an unfortunate fact: a firm’s own employees, acting on their own or with others, often represent the most significant crime exposure.

Types of Coverage Available

Numerous crime policies are available. Most commonly these are offered on a form filed by the Insurance Services Office (ISO). This article will deal with the most common coverages that should be considered by most business organizations.

Employee Theft

Almost every company needs employee theft coverage, and many property forms automatically include a limited amount. Unfortunately, those limited amounts are often inadequate, and all employers should evaluate their exposures to loss to determine what an appropriate limit would be.

The preferred ISO Employee Dishonesty policy form provides coverage for all employees on a blanket basis. The policy pays for loss of covered property caused by theft committed by one or more employees, whether identified or not, acting alone or in collusion with one or more outsiders. Coverage also extends to employees who are temporarily outside of the policy territory (generally the United States of America, its territories, possessions and Canada) for up to 90 days.

The definition of employee is very important.

An employee is defined as:

# A person, while he or she is in the named insured‘s service, and for 30 days thereafter

# Who is compensated directly by salary, wages or commissions

# Whom the named insured has the right to control

Note that all three of these conditions must be met for someone to be qualified as an employee. As mentioned above, the policy does extend to employees up to 30 days after their employment is terminated.

The definition of employee also extends to former employees while serving as a consultant to the named insured. Substitute, seasonal and short-term workers as well as leased employees and guests, students or interns are also included. Note that this latter group of people is only included when they are on your premises and not off your premises.

Employees, trustees, officers and administrators or managers of employee benefit plans are also included under the standard policy form. This allows employers to extend their employee dishonesty coverage to the employee benefit plan if it is listed on the policy.

It is important to recognize that anyone who does not qualify as an employee is not covered. This would include people such as independent contractors working for you, security guards and cleaning people. To appropriately cover this exposure, you can either require the employer of the independent contractor to post a bond, or alternatively, you can have the definition of employee redefined under your contract (but some underwriters may not be willing to do this).

You should be aware of some exclusions within the employee dishonesty coverage form. One significant exclusion pertains to employees who have previously committed a dishonest act. Any subsequent loss caused by that employee is not covered.

Inventory shortages are also excluded. There is no coverage if an inventory shortage is discovered by either an inventory computation or profit-andloss computation. Coverage would only apply if you could establish wholly apart from such computations that you have sustained a loss.”

Theft by the named insured, partners, or LLC members is also not covered. You should also be aware that indirect losses, such as business interruption, are not covered.

In order to evaluate your employee dishonesty exposure and whether or not you have appropriate controls in place to manage this exposure, you might want to complete the employee dishonesty checklist following this article.

Forgery or Alteration Coverage

Forgery or alteration coverage protects you from loss arising out of forgery or alteration of checks, drafts, promissory notes, or similar written promises.

Forgery is defined as signing the name of another person or organization with the intent to deceive.” You should be aware that signing one’s own name, with or without authority in any capacity for any purpose, is not forgery. You should also be aware that this coverage pertains to outgoing checks, drafts, and other written promises that are fraudulently drawn on your account.

For example, if checks or drafts were made out to a fictitious payee or payroll were endorsed in the name of the payee, those losses would be covered. Losses arising out of instruments that have been fraudulently altered are also covered (hence the name forgery or alteration coverage). However, coverage does not apply to fraudulent checks thatyour firm receives from others.

It is typically recommended that forgery or alteration coverage be purchased along with employee dishonesty protection. Sometimes forgery involves collusion between employees and others; if both coverages are provided by the same carrier, there is no question as to whether or not the loss is covered and, if so, which carrier is responsible.

Computer Fraud and Funds Transfer Fraud

You should also consider coverage for computer fraud committed by outsiders. Note that computer fraud committed by employees would be covered under the employee dishonesty policy.

Computer fraud covers loss or damage to money, securities and other property resulting directly from the use of the computer to fraudulently transfer property from inside the premises or banking premises to a person or a place outside the premises. The computer fraud policy covers not only money and securities, but also other property.

Therefore, computerized theft of stock, equipment and other items would be included. An exclusion in the computer fraud coverage form eliminates coverage for computer fraud in connection with loss resulting from a fraudulent instruction directing a financial institution to transfer, pay or deliver funds from the named insured’s transfer account. In order to obtain this coverage, you need a separate insuring agreement called funds transfer fraud.” Once again, we recommend that if you purchase computer fraud insurance, you should also purchase funds transfer fraud coverage.

Money and Securities

To the extent that your company has a significant cash exposure or deals in securities, you may need to consider money and securities coverage. Typically, this coverage is broken down between on-premises (“inside”) and off-premises (“outside”) losses. Inside coverage protects against losses due to destruction, disappearance or wrongful abstraction of money or securities while on your premises or on a banking premises. Outside coverage extends to money and securities that are conveyed by a messenger or armored car, or while at the home of a messenger.

This type of exposure usually has high frequency but low severity. As such, it is an exposure that a lot of companies choose to retain.

Money Orders and Counterfeit Paper Currency

Another available coverage protects you against the acceptance by your firm of counterfeit U.S. or Canadian paper currency or money orders that are not honored. This is not a significant exposure for most firms.

How Much Coverage Should You Buy?

Recognize that the limit of coverage applies to any one occurrence, regardless of how many employees may have been involved in the event. Under forgery, an occurrence is defined as all loss involving a person, even if the loss involves one or more instruments.

In order to figure out how much coverage you really need, you have to figure out what the maximum probable loss will be. Note that this is not the maximum possible loss.

Employee Benefit Plans

The Employee Retirement Income Security Act of 1974 (ERISA) requires that an employer must have employee dishonesty coverage for all persons handling funds subject to ERISA in an amount equal to 10% of the assets in the plan or $500,000, whichever is less. In order to include the employee benefit plan on the employee dishonesty form, the plan must be listed as a named insured.

Managing Your Exposure

Crime coverage lends itself to being managed. While you’ll never eliminate all crime losses, you can significantly reduce the frequency and manage the severity.

First, identify the exposures. Who might steal from your firm? What could they steal, and how might they do it? As mentioned earlier, employees have the best opportunity to steal from you. Make certain that applicants for employment are carefully screened, especially those who will be working in management level positions or other positions in which they will have opportunities to take advantage of their position. Background checks should be a part of a thorough interview process.

Make certain your accounting procedures are solid. Audit trails should help you keep track of your assets as they move through your company. Don;t hesitate to use spot checks and surprise audits.

Obvious crime prevention measures include such things as alarms, watchmen, locked facilities, and security lights. Computers and Internet access add additional layers of complexity. Use the advice of experts to make certain that security risks are appropriately addressed. $

Jeff Cavignac, President and Principal of Cavignac & Associates, heads the agency’s Professional Liability Department.

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.

Managing the Employee Dishonesty Exposure

Employee dishonesty involves employees stealing their employers assets. Although most employers feel that this could not happen to them, the fact is that it happens more often than people think, and the perpetrator is generally a long-term, trusted employee.

You can purchase employee dishonesty coverage to protect you from this exposure, but whether or not you purchase the insurance, there are steps you can take to significantly reduce your exposure to loss.

I encourage you to complete the checklist on pages 5 and 6. Any no answers are an opportunity for improvement in your current procedures. Although you can’t eliminate your employee dishonesty exposure (unless you get rid of all of your employees), you can significantly reduce the likelihood of such a claim through the implementation of internal processes and procedures. $


Cavignac & Associates

Driving Safely in Traffic

By Stuart Nakutin, PHR, AIC, WCCP, CDMC

Director of Claims and Loss Control

Long-distance drivers know that fatigue is responsible for numerous accidents. But what other factors can cause accidents when you’re simply commuting, or driving for short distances around town, making frequent stops?

Some jobs require people to spend a lot of time on the road. On any city street you are likely to see delivery vans, couriers, salespeople, and utility persons making frequent stops. Commuters can spend many hours in traffic going to and from work.

Every hour you spend on the road increases your chance of having an accident. Many accidents occur simply because the driver is going too fast. City streets usually have speed limits of 25 miles per hour or less, and you’ll often see posted limits as low as 5 or 10 miles per hour.

Speed limits are carefully selected to minimize the chances of accidents. When traffic is heavy, there isn’t much distance to stop between you and the next vehicle. The slower you go, the less distance it takes to stop. You’l also be better able to observe your surroundings, taking note of cyclists, pedestrians, and other vehicles. Observing the speed limit is one sure way to reduce your chance of an accident. On rainy, foggy, or snowy days drop your speed even lower.

When you make stops, park your vehicle carefully. Avoid leaving it where it will block traffic or create a blind spot for oncoming motorists. Look both ways before exiting to avoid collisions with other vehicles as well as bicycles and passersby.

If you must carry things in your vehicle, be sure the load doesn’t obstruct your view. It’s safer to make several trips with smaller loads than to pack your vehicle to the point you can’t see other vehicles, bicycles or pedestrians clearly.

Another common cause of accidents is not paying attention. It’s easy to become distracted, frustrated, and annoyed. Any of these can cause you to pay less attention than you should, which then results in rear-end collisions when the vehicle in front of you stops. Running stop lights and stop signs can occur if you’re not paying attention.

Paying attention to the wrong things can cause accidents, too. Reading street signs, maps and addresses on buildings while driving can lead to accidents. Find a safe place to pull over to read signs and addresses. Even better, pinpoint the exact location of your destination when you plan your trip before you begin driving.

As with long-distance drivers, fatigue also contributes to traffic accidents. Fatigue causes you to become distracted easily and slows your reflexes. Don’t take chances driving if you feel too tired. If fatigue is a frequent problem, see your doctor. Combat occasional fatigue with adequate rest, nutrition and exercise.

Many accidents and injuries can be prevented if you keep your speed down, pay attention, and avoid driving when tired. Keep these in mind when you drive and keep yourself safe! $

Generic Medications Keep You and Your Wallet Healthy

Article courtesy of Employee Benefits Department

The majority of generics are typically sold at 15% to 50% less than brand-name drugs. A generic drug is identical to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use.

You can be assured that FDA approved generic drugs have met the same rigid standards as the innovator drug. To gain FDA approval, a generic drug must:

# Contain the same active ingredients as the innovator drug

# Be identical in strength, dosage form, and route of administration

# Have the same use indications

# Be bioequivalent

# Meet the same batch requirements of identity, strength, purity, and quality

# Be manufactured under the same strict standards of the FDA’s good manufacturer practice regulations required for innovator products

Contact your physician or pharmacist for information on generic drugs. $

2006 Seminars

Cavignac & Associates’ Training Room Bank of America Plaza 450 B Street, 18th Floor, San Diego, CA

# OSHA Record Keeping / Inspections & Citations

Friday, January 6th, 2006 — 9:00—11:00 AM

# Having the Right Safety Attitude / Changing Your Safety Culture

Friday, January 20th, 2006 — 9:00—11:00 AM

# OSHA 10-Hour Course — Part 1

Friday, February 14th, 2006 — 8:00 AM — 12:00 Noon

(Attendees receive Certificates of Completion for each part OSHA will provide 10-Hour Card after ALL sessions have been completed)

# How to Run an Effective Safety Meeting and Make Your Toolbox Talks Fun

Friday, March 10th, 2006 — 9:00 — 11:00AM

All training sessions are available to our clients Reserve early / seating is limited!

For more information about upcoming seminars:

# Visit our Web site at

# Contact STUART NAKUTIN by e-mail or by phone at 619-744-0589.

Enjoy the Holidays!

1. Food shop early. Make a meal plan to feed the troops, and invest in disposable dinnerware!

2. Travel light. Ship gifts ahead of time. UPS boxes are just as much fun to open!

3. Don’t eat — exercise! Walking, sledding, building a bonfire, playing football, etc. cost nothing and alleviate stress.

4. Be realistic in terms of both time and money. Don’t overbook! If you find you have too many activities, say no you aren’t required to do everything. Make a budget, then stick to it.

5. Recharge your batteries. Schedule down time for yourself. Let others share the work! $