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Thursday, March 18, 2010


Running a business house is complicated and has lot of hazards. The business man is exposed to so many perils. The trader faces not only fluctuating market making his profits uncertain, but even where he is able to successfully run the business, he needs to take home the money, in the sense make use of the profit so gained. This is an attempt about the general enquiries that we get about Employee dishonesty Insurance – certainly not any attempt to define everything but to explain things in layman’s terms. Please read on and in case it interests do put your feedback here or send e mail to me :

Fraud, dishonesty, embezzlement are all market terms. To put mildly, fraud is an intentional deception made for personal gain or to inflict damage on another individual. Fraud is a crime, and also a civil law violation. At the end of the day, when deal is concluded and when trader receives money from business clients, it has to be properly accounted. The money so received at office is handled by various employees and those who have access to cash could embezzle the amount, leading to a financial disaster for the employer. All will agree that employee dishonesty is a serious offence and no body would like to keep a dishonest person on their rolls. This can be a sudden one off opportunistic instance or a planned one going unnoticed for a longer period. This could be the handiwork of unhappy employee, person whose economic position is unstable or simple because of the accessibility and wavering mind. Any of these would contribute a financial loss to the employer. Beware of white collar crimes and exbezzlement, which is the act of dishonestly appropriating or secreting assets, usually financial in nature, by one or more individuals to whom such assets have been entrusted. Fraud / dishonesty encompasses wrongful use of the property of another person for the benefit by other person wrongfully is embezzlement which would include misappropriation of assets.

The modus operandi ie., the method adopted for committing the crime could include:-

1) The simplest way of the person entrusted with the money running away or not depositing the money in to bank at all. Here there would be tell tale evidence and could be found out immediately but damage is done. Either the person could go absconding or even when apprehended would not be in a position to repay the amount.
2) the person could make a fake receipt of the bankers which could be detected much later
3) the person could be depositing sums less than what is to be done and again detected later
4) there could be ways where the Cashier / Accountant or other person having access tampers with the vouchers, makes false vouchers and takes away money
5) the person could connive with transacting parties in a) not collecting amounts due to the company from them b) collect less leaving out some invoices c) play havoc with Accounts burying some collections or not accounting some
6) persons not authorized could be giving some discounts or distributing some material causing financial loss to the insured company.
7) shortage of stocks is a frequent one but those simply discovered during stock taking will have to established as arising out of employee dishonesty and not mere disappearance.
8) Mere disobedience of instructions which could result in loss or money or goods would not fall within the purview of ‘fraud or dishonesty’ unless the defiance was a deliberate act with a view to obtaining improper financial gain.
9) so also dishonest concealment of error (burying a mistake) would not fall within the parameters here.
The list above is illustrative and it can expand in a very big way. In all the cases, there should be a dishonest act by which the Employer suffers financial loss.

Fidelity Insurance (previously known as Fidelity Guarantee) is designed to protect an employer against loss of money or goods caused by the dishonesty of his employees. Though there could be variants in the market, generally these are underwritten on Named Employee basis / Defined category or Position basis or at times Blanket policies (Floaters) covering the entire workforce.

The policy contract is based on a written proposal and incepts upon payment of premium. The Insurer agrees to indemnify the Insured against any direct pecuniary loss sustained by reason of any act of fraud or dishonesty committed by any Employee during the Period of Insurance and during the period of uninterrupted service of such Employee with the Insured and discovered during the continuance of this Policy or within twelve calendar months of the expiry thereof and in the case of death, dismissal, resignation or retirement of the Employee within twelve calendar months of such death, dismissal, resignation or retirement whichever of these events shall first happen.

As any policy would have this insurance is also subject to terms and conditions and the maximum liability would not exceed the amount stated in the schedule for that particular employee / position. The insurance would also have an overall limit for the policy period in respect of all claims.

When the Policy continues to be in force for more than one POI or if the liability exists under this Policy and also under some other policy, the liability would not be accumulated or increased – the aggregate liability of the Insurer arising from any no. of fraud or dishonesty shall seldom exceed the amount guaranteed i.e., the sum specified in the policy. Again the Insurer would not entertain more than one claim in respect of the action of any one employee. The logic that once identified, the employee has no place in the structure, atleast as far as Insurance Indemnity is concerned.

Some basic pre-requisites are that the employee who committed the crime should be an employee and not a person employed casually. Thus the contract of employment would be one of the basic documents. Most of the terms get defined in the Policy itself and the policy indemnifies the pecuniary loss of the Insured arising out of an act of fraud or dishonesty committed by any Employee. This act that has given rise to the claim should have occurred during the period of insurance ; during the period of uninterrupted service of the employee with the insured and should be discovered within 12 months of the expiry of the policy. Of course this period of discovery would change in the case of policies continuously renewed. Also when the act is not immediately discovered there would also be restriction of 12 months of the act being discovered from the date of death, dismissal, resignation or retirement of employee. This is a reflection of the systems that are to be in place for detecting the dishonest acts of any employee.

The intention of coverage is only for acts committed with the clear intent of an Employee obtaining an improper financial gain. In effect those losses to the Insured caused by Employee by covering up or protecting his position and would also exclude any form of sabotage made by a grudging employee.

There would always be a claim form which requires to be completed and Insurers generally appoint Chartered Accountants or surveyors with Finance background who could easily check, verify and infer the nature of dishonesty and the resultant loss. The following documents would required in general :

1) Details about the employee responsible for the loss i.e. name, address, designation, nature of duties, etc.
2) Details about the loss i.e. date of discovery, modus operandi followed by the employee causing the loss, period during which misappropriation or embezzlement occurred. If this is a single act, then it would be a lot simpler.
3) Action taken against the defaulting employee i.e. police case and copy of the FIR alongwith disciplinary proceedings and departmental enquiry, etc.
4) Details about the amount of loss i.e. the extent of loss as discovered from the books of accounts, direct recoveries if any made from the defaulting employee amounts due to the employee viz. pending salaries, allowances or cash security deposited with the employer by the employee.
5) Details of any immovable property owned by the employee, if known.

Insurers generally take Indemnity bond and proceed on recovery following the tenet of Subrogation going by the nature, extent of loss and the insured.  When the loss is quantified, it is the amount that the Insured Company stands to prejudice by the dishonest act or series of acts. When this is discovered at some point of time and when there are direct recoveries to be made from the defaulting employee, it is obvious that these amounts be adjusted and a net position be arrived at.

For example, if an employee runs away with Rs.50,000/- but the Company at the point of detection has say 25 days salary to pay him + the bonus accrued totalling Rs.20,000/-, it is natural that this Rs.20000/- be recovered and only the balance is proceeded against. The Insurers are also entitled to such pending salary, allowance, cash deposit etc.,

The erring employee could get apprehended by the Police authorities and could land up in the custody of police but that would not guarantee recovery of money nor closure of the claim. Police custody is apprehension and crime will get confirmed only when chargesheet is filed and proceeded upon. Even there, it is a criminal offence and the erring employee would get punished by fine or imprisonment or both.

If the Police are able to recover the stolen money in full or part, then the Insured will have to take necessary legal steps for recourse to that money. There could also be situations, where the criminal pleads guilty but had spent the entire amount and is not in a position to repay……………

The onus is on the insured to prove dishonesty and if it is a named policy, to establish crime of a particular employee for preferring a valid claim. On a "blanket" policy it would merely be sufficient to produce substantive evidence that the loss was brought about by an Employee.

Whether a claim or not, it makes sense for the Employers to have good auditing systems conducted at a shorter periodicity to ensure that any such act does not go unnoticed.

ALSO take care to discuss your requirements with your Insurer and check whether the cover offered / taken really suits your needs. Beware that the term Employee wherever appearing in this policy means any person (other than a person whose employment is of a casual nature or who is employed otherwise than for the purposes of the Insured’s business) who has entered into a contract of employment with the Insured whether such contract of employment is express or implied, oral or in writing.

With regards
S Sampathkumar.


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