01 Dec Protect Your Business: Dishonesty Bonds

True story: A bookkeeper for a gas station began stealing from his employer, embezzling thousands of dollars in just a few months. The owner, unaware of the employee’s dishonesty, went on vacation, leaving the bookkeeper with unsupervised access to the business’s bank accounts. Upon returning, the owner discovered that the bookkeeper had absconded and that the business had suffered a huge financial loss.

If you’ve ever had to deal with employee theft, then you know what a serious threat it poses to your business. But how bad is the problem? Consider these sobering statistics:

• According to a study by the Association of Certified Fraud Examiners, businesses lose an average of 7% of their annual revenues to fraud, a figure that translates to about $994 billion in losses when measured against the projected Gross Domestic Product (GDP) for 2008.
• The same study revealed that businesses with 100 employees or less, because they typically have fewer fraud-detecting resources than larger companies, suffer disproportionately higher losses, amounting to a median loss of $200,000.
• A U.S. Chamber of Commerce survey reported that one-third of business bankruptcies are due to employee theft.

Given the current state of the U.S. economy, business trend watchers predict that employee theft is likely to increase next year. And while all employers would prefer to believe that their employees are above suspicion, experts recommend that they take sensible measures to protect their businesses from this insidious “inside” threat.

Some anti-theft measures include these:

• Hire the Right People: Conducting background checks before hiring individuals, especially those whose positions give them access to cash or credit card information, is a necessity. The process includes past employment verification, criminal background checks, drug screenings, education/certification verification, etc
• Implement Effective Controls: Limiting access to cash and financial information, keeping certain employees’ duties separate to prevent collusion, and conducting both regular and irregular audits all make it harder for employees to steal.
• Keep Employees Informed: Regularly explaining to employees your company’s policies and procedures on preventing, detecting, and punishing fraud, as well as reviewing the company’s ethical standards, can discourage theft.
• Provide a Confidential Reporting System: Giving employees access to an anonymous “hotline” by which they can safely report their suspicions has reduced theft and fraud significantly in companies that have implemented such a system.

Yet, even with strict controls in place, theft and fraud happen. That’s why businesses require the protection of a Dishonesty Bond.

The Dishonesty Bond is a type of fidelity bond in which the insurer agrees to indemnify an employer for any loss the employer sustains as a result of the dishonesty of its employees. Because employee dishonesty is now regarded to be as predictable as other common business risks such as fire and liability, the Dishonesty Bond is handled more like insurance than a surety. In fact, the Dishonesty Bond is sometimes referred to as a crime policy, or, more formally, as Employee Dishonesty Coverage and is usually written on either a schedule or a blanket bond.

There are two types of schedule bonds:

• The Name Schedule Bond, which covers only those employees listed on the schedule for a set amount accorded to that person; 
• The Position Schedule Bond, which covers any employees occupying any one of the positions listed on the schedule for a set amount accorded to that position.

The other type of Employee Dishonesty Coverage is the blanket bond, which covers all of the insured’s employees without specifically naming them.

The two bond forms each have their advantages and disadvantages, so employers must choose the form that best addresses their particular risks. An insurance professional will assist employers in selecting the right coverage, as well as explain the terms of a policy, including:

• Eligibility;
• Types of losses covered;
• Liability limits; and
• Continuity of coverage.

Dishonesty Bonds are relatively easy to obtain and not that expensive; smart employers would do well to consult their insurance specialists if they do not have coverage already.

Any business can become a victim of employee theft, so don’t wait until your company is hit. Protect the business you have worked so hard to build.