Employee Dishonesty Insurance – Who Needs It?

Employee Dishonesty Insurance is needed by every business—large or small.  All businesses are vulnerable to this threat.  Every year, millions of dollars are lost due to employee dishonesty, but most business executives believe it will never happen to them.  Many business owners, particularly smaller ones, feel that their employees are like family and that no one would steal from them.  Other organizations believe they have enough controls in place so that “it simply could not happen here.”  Both are wrong! 

Employee theft usually comes as quite a shock to the employer.   Many times the theft has gone on for years but has been skillfully concealed by what had been considered as a hardworking, loyal employee. That “loyal,” (but dishonest) long-term employee knows the weaknesses of your internal controls, has the trust of your organization, and has the potential of jeopardizing the financial health of your organization. 

Many employee thefts are never even reported to police because the employer is embarrassed and does not want the public to learn that they did not have the proper controls in place that would allow this to happen.  This is particularly true for non-profit organizations that rely upon public donations for funding.

The 2014 Global Fraud Study conducted by the Association of Certified Fraud Examiners provided the following statistics:

In 1999, Michael G. Kessler & Associates, Ltd, an investigative and forensic accounting firm, conducted a study surveying over 500 employees nationwide on the issue of employee theft in the work place with disturbing results.  The survey revealed:

21% will never steal from their employer

13% will steal from their employer

66% will steal if they see others do so without consequence

Based on this survey, 79% of all employees have the capacity or willingness to steal from their employers!

There are two steps you can take to protect your business:

Criminologist, Dr. Donald R. Cressey, put forth his hypothesis, “the fraud triangle,” to explain why people commit fraud.  The three elements in the fraud triangle are opportunity, pressure (motivation), and rationalization (moral justification).  Dr. Cressey was convinced that if all three factors were present, then fraudulent behavior was nearly inevitable.  Obviously the element of “opportunity” is where a business owner can exert control and where loss prevention efforts should be focused.

Examples of procedures that owners can put into place to minimize opportunity include:

Despite your best efforts at prevention, losses can still occur.  Even if the employee confesses to the theft, chances are that he has squandered the money so there is little chance of restitution.  Employee Dishonesty coverage will protect your business if an internal theft does take place. 

Employee dishonesty insurance specifically provides coverage for the criminal acts committed by employees.  It covers losses where an employee steals money, securities or property from you.  Many policies also include or can be endorsed to provide coverage for your employee’s theft of clients’ money or property. 

Employees who steal from their employers often do so over many years before management even becomes aware of it.  Once detected, the matter will need to be investigated and proven that one or more employees were responsible for the theft in order for the insurance company to pay your claim.  A proof of loss will have to be provided to the carrier which provides a detailed narrative of how the theft was perpetrated, the dates involved, and how much was taken.  Forensic accountants are often needed to help you prove that a theft occurred at all (versus poor record keeping) and if so, to quantify the amount of the theft.  Fortunately, many policies also include some coverage for claim preparation costs (limits vary by policy) which helps to offset the costs of outside consultants.

Employee Dishonesty coverage is triggered by the “discovery” of the loss.  It is important to note that if you suspect a loss may have taken place, you should notify the insurance carrier immediately.  Do not wait until you have quantified the full amount of the loss.  Most policies have a 90 day notification deadline from the date of discovery in order for coverage to apply. (Number of days can vary.) You then generally have 120 days to quantify your claim and present the proof of loss.  This time frame can be extended if you request it in writing from the carrier with a reasonable explanation as to why more time is needed.

It is important to note that the crime policies can be written in one of two ways, particularly since so many employee thefts take place over a long period of time:

Discovery Basis – covers losses that are discovered by the insured during the policy period, regardless of when the loss occurred.  

Loss Sustained Basis – covers losses that take place and are discovered during the policy period.  It will also cover losses that occur under a prior crime policy if the prior crime policy was:  1) in force at the time of the loss, b) the crime coverage was in effect continuously and c) the loss would have been covered by the prior crime policy and the current crime policy.

The discovery basis is the better form for an insured that has not purchased a crime policy previously, or who purchased insufficient limits in the past. 


The statistics show that employee theft is a very real threat to all businesses.  The risks for serious financial damage from such a loss can be greatly reduced by obtaining the proper insurance and by instituting a good loss prevention program.  RCM&D can provide assistance with both.

If you want further information, contact James Gaughan, Risk Control Manager.