In nearly 145 years, we have spoken with countless Insureds and Brokers, heard just about every story and reasons as to why organizations feel they don’t need crime insurance. As the old saying goes, the “customer is always right”, not every company needs crime insurance, but the ones who had the foresight to see the risks, anticipate the exposure and purchase the back-stop were glad they did.
This two part series will debunk your preconceived notions as to why you feel you may not need crime insurance, and we hope that it will provide some unique insights to help in deciding why your organization does actually need this type of insurance.
I Trust All of My Employees
Trust is important. It’s required to run an organization effectively, but sadly, trust can also be abused and the fallout from that abuse can be significant.
One of the more common reasons we hear, notably from smaller or mid-sized companies, as to why they don’t need crime insurance, is that they trust their employees. They know everyone, they are all hard working and well respected. They have done background checks, have the controls in place and the group is so tightly knit they can’t see how anyone would be able to successfully steal from them. We haven’t come across a case where an executive said “We knew that person was bad – that doesn’t surprise me that they just bilked us out of $150,000.”
One of the first things we get exposed to when we adjust a crime claim is the sense of betrayal that the organization feels; and we mean the organization as a whole. Most people who commit these crimes were trusted workers who performed a key role within the organization.
Employees are rattled, co-workers feel betrayed and are often baffled at how the employee pulled it off. Friends of the fraudster lose faith in their ability to tell a friend from a foe. Morale takes a beating and people can begin to second guess themselves. No amount of crime insurance is going to help an organization avoid those feelings, but a healthy sense of caution and adequate preparation is key to coming out the other side intact.
Having the financial resources to make the organization whole again means one less thing that the executives need to manage and allows them to focus their attention on what really matters – getting back to business as usual and supporting your employees through this tough time.
Trust is good. Buying crime insurance to protect your company isn’t a betrayal of that trust, but rather a reinforcement of your commitment to your organization and those loyal employees that will be there when the dust settles.
We Have Coverage through Our Office Package Policy
Yes, you probably do. All of $10,000. And chances are good that it is pretty basic as only a few insurers really offer robust coverage in their office package policy. In most of the situations we see, companies can easily spend over $10,000 in determining how much money they actually lost – forget having anything left over to pay the actual loss.
Small private businesses in Canada (those with fewer than 100 employees), according to the Association of Certified Fraud Examiners’ Report to the Nations : Canadian Edition 2016, suffered a median loss of over $300,000 per incident, with a median loss for all Canadian cases in excess of $150,000. That $10,000 won’t likely go very far.
One of the most common claims trend that consistently makes the list is uninsured or underinsured losses; put simply – insufficient insurance, where organizations that have chosen to buy the bare minimum limit are later faced with a “limit loss” that doesn’t cover the amount of the loss incurred. We also receive a lot of crime insurance applications from first time buyers shortly after the company experienced a bad uninsured crime loss.
While we can never say that a certain limit is adequate, our typical recommended starting point for most buyers should be $1,000,000 or 5% of annual revenue, whichever is greater (but we’ve seen tons of claims well in excess of this million dollar mark) The 5% figure is roughly in line with what Association of Certified Fraud Examiners (ACFE) estimates the average business loses every year to fraud.
Point being, while many companies feel they have adequate insurance in place, our experience tells us that having such a small limit added to a policy designed to cover property and casualty risks doesn’t fully protect you.
We Have Robust Controls in Place to Catch This Type of Thing before It Gets Bad
Having adequate financial controls in place is key and an excellent tool to help mitigate the severity of a loss. They are not however going to catch everything. We underwrite to a very high standard at The Guarantee so it can be said that nearly all of our Insureds have at-or-above average financial controls and they still experience losses. Sometimes those losses are big.
One of the unsettling things for us as underwriters is the reality that controls are not always followed, no matter how well documented. Exceptions are made and “business reality” sometimes makes 100% adherence to these controls challenging. Employees are often looking for well-intentioned ways of driving efficiency and getting more done during the workday. The fast pace of business and the nearly perpetual pressure on costs and headcount create an environment where the efficacy of those controls may, in some instances, be compromised.
In addition to “standard” financial controls, like countersignature of cheques, dual-authorization requirements for wire transfers, call-backs, segregation of key duties and frequent bank reconciliations, companies should create a top-down culture of zero tolerance for unethical behavior, implement whistleblower hotlines (no matter the size of the company) and clearly explain the company’s stance on fraud to all employees. A good defence goes beyond having controls in place.
Fraudsters, be they employees or outsiders, throughout history have demonstrated a remarkable capacity to extract money from companies. As we step up our security, they step up their game and evolve. When controls go high-tech, they go low-tech – and vice versa. It is a never ending game and for any one company to think that a certain amount, type or style of control or security will keep all fraudsters entirely at bay is sadly in for a shock.
Companies do their best to protect themselves. However, adequate insurance is the hedge when “their best” may not be good enough at all times.
ACFE (2016), Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, Association of Fraud Examiners, Austin TX. Accessible at https://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2016/2016-Report-to-the-Nations-Canadian-Edition.pdf
Joshua Laycock is The Guarantee’s National Fidelity Product Manager responsible for the maintenance and development of underwriting standards, product innovation and supporting strategies for one of Canada’s largest Fidelity insurance portfolios. He started his career over 10 years ago working with a multi-national insurance brokerage in Toronto as a broker and client executive in the Financial Institution and Professional Services industry practice before moving to the company side five years ago. He has a BComm from the University of Toronto and holds the Chartered Insurance Professional (CIP) and Registered Professional Liability Underwriter (RPLU) designations.
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Please be reminded that the following blog/article is intended to be used for informational purposes only and nothing contained herein shall be deemed to provide legal, technical or other professional advice or to represent actual or potential coverage under any insurance contract. At all times, the specific issued policy in its entirety including all definitions, conditions and exclusions is to be used when determining the scope of potential coverage under The Guarantee insurance products. The Guarantee Company of North America disclaims all warranties whatsoever.