As everyone in Lancaster County is aware by now, a local multi-generational family business was shut down almost overnight due to apparent fraud perpetrated by an employee of the company. This is a terrible situation for everyone involved, and we certainly wish the best to all of the employees and their families who were affected. The question for this blog is, what can we learn from this situation to help minimize the risk to our own businesses, and how might insurance coverage come in to play?
We don’t know the specific details of the alleged fraud that took place, so it’s impossible to say at this time whether insurance coverage could come into play or not. I’m just going to discuss two coverages that could come into play in a fraud situation.
1.) Employee Dishonesty – Sometimes referred to as “Employee Theft”, this is a Crime coverage that protects your business from theft by employees, which is not covered by standard Commercial Property insurance. Most often these are situations where an employee with access to the company funds siphons off money in small amounts over a period of time, and by the time it is discovered there may be tens of thousands of dollars (or more) missing. Sadly, we read about these situations in the newspaper frequently, and oftentimes involving small companies. We find that business owners tend to believe that their employees would never steal from them, until they find out that they have.
This risk of employee theft is something that you can insure against, but you can also mitigate the risk with some straightforward procedural safeguards. These can include:
- Requiring two signatures on all checks
- Having the person who reconciles bank accounts be different than the person who issues checks
- Conduct financial audits
- Maintain oversight of the finances and try to avoid having one person with too much control
While we generally think of Employee Theft being the theft of money, it can also include the theft of inventory, stock, tools, or other business property.
2.) Directors & Officers (D&O) Liability Insurance – Most people are familiar with D&O from a Non-Profit perspective as they understand the desire to be protected from liability for their service on a charitable board. What is less understood is the need for D&O coverage for a privately-held, for-profit business. Once again, while we don’t know the details of what took place in the situation locally and whether coverage would apply or not, it does serve as a reminder why D&O coverage has value even for a privately held company.
Directors and Officers make decisions that may affect anyone who has a relationship with the company: Shareholders, regulatory agencies, creditors, suppliers, competitors and customers. Anyone who believes they have been harmed as a result of those decisions may take legal action, requiring costly legal expenses to defend the company and its directors and officers. If your private company has outside individuals serving on the board, D&O coverage is a “must” to protect those individuals from personal liability. Even if there are not outside individuals, D&O coverage is still critical to protect the company and its officers from potentially crippling legal expenses and judgements. This can include claims from creditors alleging mismanagement of the company resulting in their financial loss.
While we all sympathize and hope the best for the affected individuals in this tragic situation, hopefully we can all learn something as well and use this as an opportunity to improve our procedures to reduce risk, and review insurance plans to make sure we are more adequately covered.
Feel free to reach out if you would like to discuss any of these issues.