Understanding Employee Dishonesty Insurance: A Guide for Agents and CSRs

What Is Employee Dishonesty Coverage?

Employee dishonesty coverage responds to dishonest acts by employees that cause the employer a loss.

Typical covered schemes, all forms of employee fraud:

• Embezzlement of funds from accounts or registers
• Financial forgeries, such as checks signed without authority
• Unauthorized money transfers to the employee's own account
• Fictitious purchases from fake vendors the employee controls
• Credit card fraud using company cards for personal spending
• Payroll padding with ghost employees
• Asset misappropriation of inventory or equipment by an identified employee

Hypothetical example:

1. The schemeA bookkeeper at a small distributor issues credit card refunds to her own card for two years.
2. The discoveryThe owner spots the pattern during internal audits.
3. The resultBecause an identified employee took the money, the result is generally a covered direct loss, subject to the form, limit and deductible.
4. The account manager's next stepReport the claim promptly and help the client gather bank and card statements for the proof of loss.

Honest mistakes and paper fraud are different:

• Accounting errors are not theft and are not covered.
• Errors and omissions coverage handles professional mistakes, not employee crime.
• Financial statement fraud, like false financial statements, usually isn't theft without a taking.
• Commercial property insurance generally excludes employee theft.

Employee Theft Coverage Under Commercial Crime Insurance

Agents usually place this protection as one insuring agreement in a commercial crime insurance policy, not as a standalone product. The same commercial crime policy can add forgery and alteration, inside-premises theft of money, computer fraud and funds transfer fraud. Carriers may also call it crime fidelity insurance, and some businessowners policies offer employee dishonesty as an optional coverage. When moving a client between discovery and occurrence-based crime forms, confirm prior losses stay covered.

What to check on the crime insurance coverage form:

• Wording: Employee Theft or older employee dishonesty language
• The terms and conditions defining "employee," including leased workers
• Trigger: a loss discovered in the policy period, or one sustained in it
• Limit basis: a per loss limit or per occurrence limit, plus deductible
• Older fidelity coverage forms: a per employee limit or per position limit
• Endorsements for client property and employee benefit plans

How a Fidelity Bond Compares to Crime Coverage

The names overlap. An employee dishonesty bond and a crime form usually describe the same insurance protection against crimes committed by employees. The real difference is whether the coverage is optional or required by law or contract.

• ERISA fidelity bond: generally required for people handling benefit plan funds
• Financial institution bond: what banks and credit unions buy instead
• Commercial organizations: usually buy employee theft through a crime form
• Public official and license bonds: set by statute or contract

Check plan documents and contracts for required bond amounts before quoting.

Exclusions and Limits in Employee Dishonesty Coverage

Common exclusions, which vary by form and insurer:

• Theft by the named insured, partners or LLC members
• Inventory losses proven only by inventory counts or profit math
• Indirect loss, such as lost income or business interruption
• Consequential loss, such as reputation harm
• Trading losses, even when the employee exceeded authority
• Government seizures of property
• Data breaches and disclosure of confidential information
• Any dishonest employee you already knew had stolen before

Keeping unreported crimes quiet to give someone a second chance can leave later employee dishonesty claims unpaid.

Coverage for an employee generally ends once an owner or officer learns of a theft by that person. Keeping unreported crimes quiet to give someone a second chance can leave later employee dishonesty claims unpaid.

Next step for account managers: at renewal, ask who handles cash, who approves vendors and who reconciles bank accounts. Small businesses where one person does all three need extra attention. Document the client's risk management practices, and explain the coverage implications of each exclusion in writing so financial losses do not come as a surprise.