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Win the Fight Against Employee Theft

How to protect your business with proper insurance and internal controls.

You treat your employees like family. With low turnover and high morale, you figure your workers would never engage in fraud or embezzlement.

Think again.

Buried in debt and facing steep mortgage payments, even honest employees can grow desperate. Small and midsize companies that lack sophisticated internal controls are especially vulnerable to theft.

“It often starts with an employee ‘borrowing money’ from the firm without telling anyone,” says Scott Simmonds, an insurance consultant in Saco, Me. “The intent is to pay it back and nobody will know. But they don’t pay it back. It snowballs and they steal more.”

Your property insurance does not cover losses tied to employee theft or dishonesty. From credit-card fraud to theft of physical equipment, your company can suffer a severe hit from such misconduct.

A General Liability (GL) or Business Owner’s Policy (BOP) may include a small amount of coverage for acts of employee dishonesty. But such coverage (often with low limits from $5,000 to $50,000) offers little solace if a staffer steals far more.

That’s why it pays to purchase additional Employee Dishonesty coverage, especially if your staff handles cash and securities. Yet raising your limit to, say, $100,000 may still prove too low.

“Ask your commercial agent how much Employee Dishonesty insurance you have and what it covers,” says Barbara Shepherd, an advisor with CommercialInsurance.net, an online commercial agency in Norman, Okla. “Your agent will ask about the number of employees and their job responsibilities. Your answers help determine the coverage amount you need.”

Because employee theft tends to unfold slowly with leaking cash over long periods, losses can mount. By the time you discover the problem, its severity can shock you.

Ask your agent to provide comparative quotes for $500,000 and $1 million in Employee Dishonesty coverage, Simmonds says. While premiums vary, expect to pay roughly 60% more when bumping up from $500,000 to $1 million.

“If you run a cash business, $500,000 is an absolute minimum,” he adds.

Prevention From Within

If you set up internal controls to minimize the odds of employee theft (or at least catch it early), you reduce the odds of catastrophic loss. Take these steps:

  • Establish an employee code of conduct as well as antitheft policies that state you will not tolerate fraud and you will engage the appropriate legal and law enforcement authorities to address any such incidents.
  • Separate duties among finance employees and require dual signatures on business checks. Split the job of collecting money and depositing it in a bank. The person who approves expenditures should not also write the checks for them. If one employee keeps your books, assign someone else to reconcile the books.
  • Teach employees that theft hurts your bottom line and thus endangers their jobs and the whole business, so it’s their duty to report questionable actions or behaviors. Set up a hotline for anonymous tips.
  • Maintain an accurate inventory control system and track sales and shipments carefully.
  • Conduct background checks before hiring employees.
  • Conduct random audits on both business payments and payroll every few months. Review payments to vendors to confirm they’re accurate, and give paychecks directly to each employee. “If you have checks in your hand after you’ve paid every employee, find out why,” says Allan Bachman, education manager at Association of Certified Fraud Examiners in Austin, Tex. “A payroll manager can create a fictitious employee. It happens all the time.”

Keep Emotions in Check

Employee Dishonesty coverage requires you to provide information to your insurer about a claim so that it can verify the loss. You must also cooperate with law enforcement.

When purchasing the policy, you may not think twice about the “cooperation clause.” But after uncovering a major theft, gird yourself for an emotionally wrenching ordeal. Typically, the culprit is a loyal fixture in your organization.

“Beyond the civil case, there’s a criminal component,” says Carl Anthony Maio, an attorney who chairs the Corporate Insurance Practice Group at Fox Rothschild LLP in Warrington, Pa. “Once you report the theft, the person will be arrested and can face a felony charge. There’s a reluctance [by many employers] to have the person incarcerated and face the criminal justice system.”

Accepting the fact that a once-trusted employee is a criminal is only half the battle. You should sever the relationship and resist the individual’s pleas to pay restitution.

If you treat the dishonest employee as a friend and show leniency, you may feel better for lending a hand. But by accepting an “I’ll pay you back” promise, you hurt your chances of collecting a quick insurance payout.

“Once you start down the path of voluntary restitution, you disturb the insurer’s liability obligation,” Maio warns. “The insurer must pay all obligations it’s legally required to pay. With a five-year restitution plan, it’s more difficult for the insurer to assess liability and pay the claim.”

Beware of Tricky Exclusions

Like all insurance policies, Employee Dishonesty coverage comes with its share of exclusions. Know what you’re buying so that you secure the broadest protection with the fewest loopholes.

For example, most Employee Dishonesty policies exclude coverage for individuals who are known to have committed dishonest acts in the past. If you suffer a huge theft loss, the insurer will investigate and ask if the employee ever mentioned stealing anything.

“You might say, ‘He once told me he stole a fishing rod in school,'” Simmonds says. “By saying you were aware the employee stole in the past, it can trigger the exclusion.”

When you review the quote for Employee Dishonesty coverage, have the insurer restrict the exclusion by setting a date for the employee’s last known dishonest act and a monetary limit for such an act. You’re less apt to face a claim denial if coverage kicks in as long as you aren’t aware of a dishonest act in the last 10 years that led to a loss of more than $1,000.

Links and Resources


1) SACS Consulting & Investigative Services Inc. provides many free resources on its website (www.sacsconsulting.com) including a security assessment form and a pre-employment applicant release form that authorizes you to conduct background checks on job candidates.

2) Association of Certified Fraud Examiners provides a Fraud Prevention Check-Up CD-ROM and other low-cost tools on its website (www.acfe.com) or call (800) 245-3321.

3) National Association of Insurance Commissioners lists contact information for each state’s insurance department at www.naic.org/state_web_map.htm. Vet your commercial insurance agent by checking with your state’s insurance department for any complaints on file.


1) Preventing and Detecting Employee Theft and Embezzlement: A Practical Guide by Stephen Pedneault (Wiley, 2010) is a 336-page book for small business owners to prevent and investigate employee theft.

2) Solving Employee Theft: New Insights, New Tactics by James W. Bassett (BookSurge, 2008) is a 330-page book with preventive tips to stop employee theft. The author also sells related tools and resources at his website, www.TheftStopper.com.

Morey Stettner is the editor of Managing People at Work and the author of five business books, including Skills for New Managers (McGraw-Hill). Based in Portsmouth, N.H., he coaches executives on their communication skills.

About morey stettner

Morey Stettner is the editor of Managing People at Work and the author of five business books, including Skills for New Managers (McGraw-Hill). Based in Portsmouth, N.H., he coaches executives on their communication skills.