While the holiday season is the most profitable time of the year for retailers, the unfortunate reality is that it is also the time when employee theft is most prevalent. Increased store traffic, the shift in management's attention to keeping stock available and the barrage of seasonal employees create an environment ripe for crimes of opportunity such as employee theft. According to the Centre for Retail Research, U.S. retailers' losses from employee theft last year were in excess of $18.4 billion.
Retailers can protect themselves from potentially exorbitant losses by utilizing their fidelity insurance. While insurance may not be the first concern for a company when dealing with employee theft, retailers must assess the coverage that is in place for potential insurance claims in order to maximize profits during the holiday season.
Most large retailers have fidelity policies in place, yet each year, sophisticated companies leave millions of dollars of fidelity insurance assets untapped. Most of these insurance assets remained untapped because the retailer was unaware it had coverage for the loss, didn't understand the impact of certain provisions in the policies or failed to properly file a claim or abide by other conditions in the policies.
In this article we address (i) the types of losses that are covered under fidelity policies, (ii) provisions in fidelity policies that regularly impact retailers' ability to recover losses, and (iii) simple steps retailers can take to maximize insurance recoveries after an employee theft.
What losses are covered under fidelity policies?
Fidelity insurance policies cover loss of money, securities or inventory resulting from crime affecting the company. Liabilities covered by fidelity insurance usually fall into two main categories: (1) employee dishonesty coverage, which pays for losses caused by dishonest acts of employees, such as embezzlement, forgery or alteration, fraud and theft; and (2) money and securities coverage, which pays for money and securities the company loses through burglary, robbery, theft, disappearance and destruction. Fidelity policies also may include broad coverage grants for investigation costs or specific endorsements granting coverage for these costs.
Provisions in fidelity policies every retailer should understand
The following three policy provisions often make the difference between a covered claim and a non-covered claim for retailers: the definition of employee, what triggers a "discovery" of loss, and the cancellation clause. These are common areas of confusion and regularly form the basis for disputes when retailers file fidelity claims.
Who is an employee?
Fidelity policies cover losses for employee dishonesty, but the definition of "employee" varies substantially between policies. Some policies contain broad definitions that include salaried and hourly employees, directors and officers, consultants, check processors, and temporary and seasonal workers, including employees provided by employment contractors or temp agencies. Most fidelity policies' definition of "employee," however, is much narrower and may cover only salaried employees that the company compensated, directly controlled, and had direct authority to hire and fire. A retailer should review the definition in its own fidelity policy and ensure that the policy captures all employees it wants covered, paying specific attention to how seasonal and temporary workers are treated.
How is the policy triggered?
Most fidelity policies are triggered by the "discovery" of a loss. When a loss is actually "discovered" is often a vigorously contested issue. This can impact which policy must respond to the loss as well as the time the policyholder's obligation to provide notice to its insurance company arises. Some policies deem discovery to have taken place on the date the retailer became aware of facts that would lead a reasonable person to assume a loss had occurred. Other policies deem discovery to have taken place on the date the retailer learned that an employee committed a "dishonest act." Who within the company needs to be made aware of the loss before the policy is triggered also varies among policies. Retailers should review the language in their fidelity policy and ensure (i) that they understand what triggers their policy and (ii) that they have proper procedures in place for losses to be reported both within the company and to the insurer.
Retailers need to understand the cancellation clauses in their fidelity policies. The typical "cancellation" or "termination" clause in a fidelity policy provides that coverage for an employee is terminated as soon as the retailer learns of any dishonest or fraudulent act committed by the employee, whether the act was committed while in the employment of the insured or otherwise and regardless of whether the type of dishonesty is covered by the insurance. Retailers should understand that a dishonest act that occurs outside of work and unrelated to employment, but that the employer has knowledge of (i.e. child support violation where employer has to garnish wages) may void coverage.
How retailers can maximize their fidelity coverage following the discovery of employee theft
Once you determine that an employee theft has occurred, it is essential to follow four simple steps to maximize your coverage.
First, immediately notify your fidelity carrier in accordance with the procedure and deadlines in the policy. While the consequences of late notice vary based on the jurisdiction and the policy language, this is a coverage dispute that, with foresight, policyholders can and should avoid.
Second, review the investigation cost coverage under your policy and tailor your investigation to obtain the full benefit of your insurance assets. Even if your fidelity policy does not explicitly provide coverage for investigation costs, some costs may be recovered under a standard "recovery clause" found in most fidelity policies, assuming your investigation is tailored properly (i.e., you tailor your investigation to obtain recovery and determine the scope and extent of the loss).
Third, take the time to comply fully with the proof of loss provisions. Fidelity policies usually contain strict proof of loss provisions that require a policyholder to swear under oath and provide details and documentation of the loss within a specific period of time, often within 120 days.
Fourth, reach out to experienced coverage counsel for large or complicated losses. Experienced coverage counsel can assist you in reviewing your rights under the insurance policy, navigating the policy traps and exclusions, tailoring your investigation plan, and filing your proof of loss in a way that maximizes recovery and minimizes the risk of litigation.
If you take the time to understand your fidelity coverage and reach out to experienced coverage counsel when needed, you can maximize your insurance assets to minimize the impact of employee theft on your holiday profits.
Selena J. Linde and Michael T. Sharkey are partners in the Insurance Coverage practice of law firm Perkins Coie LLP (perkinscoie.com), practicing in the Washington, D.C., office. They have extensive experience representing companies throughout the country, including those in the retail sector, on a variety of insurance-related issues. Linde can be reached at SLinde@perkinscoie.com and Sharkey can be reached at MSharkey@perkinscoie.com.