Employee Dishonesty Insurance – Generally Doesn’t Cover Everyone

I have posted previously on the importance of every employer to ensure employee dishonesty, employee fidelity and/or employee crime coverage is included within your current policies.  Often this policy is the only means for recovery from an employee theft.

Even if coverage is maintained, I am confident most insureds are unaware of two common limitations within the coverage should there be the potential for a claim on the policy due to a potential theft of embezzlement.

First, the coverage often does not cover the acts or actions of an owner, partner, shareholder, or member (LLC) of the insured.  So, for an example of something we commonly see where an owner or partner steals funds and/or assets from the entity and the other owners or partners, the coverage would likely not be applicable to provide restitution to the entity for the diverted funds – as the perpetrator was an owner or partner. The theory is that the insured cannot steal from themselves.

Second, the coverage usually covers any employee (defined within the policy) commonly referred to as blanket coverage.  There is at least one exception to who would be covered – someone who has stolen in the past.  If there is any evidence that the insured knew, or should have known, that an employee had been dishonest in the past, whether in their present employment or in previous employments, the individual is not insurable, and therefore any actions by that individual are not recoverable.  Further, once potential dishonesty is discovered on the part of any employee, any loss beyond that date of discovery by the individual is generally not recoverable as well (the insured should have mitigated their loss and prevented any further theft).

This should have a direct impact on the screening and hiring process for most employers.  If a potential candidate will have access to funds and/or assets within their employment, and the candidate has an issue of dishonesty in the past, it is likely if the candidate is hired anyway and a subsequent loss is suffered due to the actions of that employee, there could be no recovery through the policy.  In investigating the claim, the insurance carrier will request copies of the individual’s personnel file as well as conduct their own investigation into the background of the suspected perpetrator.  Chances are they will identify the past dishonesty and deny the claim.

These are not newly added restrictions to recently issued policies.  In fact these limitations have existed for years.  However, due the growing scrutiny we have been experiencing by carriers reviewing and investigating dishonesty claims to determine if payment should be made on the claims, it is apparent many employers who maintain this coverage are unaware of these limitations.