Employee embezzlement, the act of an employee misappropriating company funds or assets for personal gain, is a pervasive risk that businesses cannot afford to ignore. While organizations often implement internal controls and monitoring mechanisms to mitigate this risk, no system is foolproof. Fidelity coverage, a specialized type of insurance that protects businesses against losses caused by employee dishonesty, is often ignored or has inadequate coverage.
The Growing Threat of Embezzlement
Modern businesses face a rapidly evolving threat landscape where employee embezzlement remains a prominent concern. According to the Association of Certified Fraud Examiners (ACFE), businesses lose an average of 5% of their annual revenues to occupational fraud, with embezzlement being one of the most common forms. These schemes can range from simple theft to complex fraud involving financial manipulation, often undetected for years. Oddly, smaller businesses have higher average losses as compared to larger organizations.
Limitations of Internal Controls
While robust internal controls, audits, and employee vetting are essential, they cannot entirely eliminate the risk of embezzlement. Skilled perpetrators can exploit loopholes in systems, collude with others, or manipulate processes to bypass safeguards. In some cases, long-term trusted employees may be the culprits, making it even harder to detect fraudulent activity.
Increased fidelity coverage serves as a safety net when internal controls fail.
How Does Fidelity Coverage Work?
Once a claim is filed, depending on the provisions, the company can be reimbursed for the loss as well as the costs of quantifying the loss – which can be substantial. The issue is coverage limits and policy provisions. A policy limit of $50,000 or $100,000 will not go very far. In many instances, a fraud may go on for a number of years and total several hundred thousand dollars.
The good news is the coverage is generally very inexpensive – relatively speaking.
Want More Protection?
Fidelity coverage is limited to employees, whereas crime coverage provides broader protection against criminal acts – covering both internal (employees) and external (third-party) crimes. Examples would be credit card and electronic fraud, as well as cyber fraud (if included in the policy).
Conclusion
At a minimum, if you don’t know your current fidelity coverage, find out. Then, discuss with your agent to determine if the limits are adequate and what additional coverage might cost.
We’re always available to help; contact your Dent Moses advisor with any questions.
