Crime insurance, also known in some instances as bond insurance, is a type of insurance rarely thought of because of the distasteful nature of the risk that it covers. It is designed to protect against the sometimes inevitable situation of employee theft and dishonesty. There are several different kinds of bond insurance that are offered by insurance companies. They each cover the potential risks that small businesses carry when they hire employees. Almost every business has to hire a few employees no matter the size, and with that task comes certain responsibilities. Employees have access to certain assets that could be used wrongfully. Business owners should have a comprehensive set of insurance policies that protect against many different types of employee dishonesty.
Crime insurance is ultimately designed to protect against malicious employees. There are specific kinds of bonds that have been designed for businesses like banks, insurance companies, and mortgage banking firms because of the sensitive nature of their businesses. Those employees have access to a lot of money and could misuse that access. These employees at fault most oftentimes do not start out as malicious employees and may even be trusted friends and confidantes employed for years before they start stealing and going down a dishonest past. One in four employees who steal have been on the company’s payroll for more than 10 years. Every business should have at least a blanket coverage policy that does not necessarily cover one single employee but the entire business to have real peace of mind and ultimately create a good system of trust. The existence of the bond insurance policy alone will deter employee theft. If they are aware that there is protection against it they may think twice before committing a crime. These are serious crimes as well, it is estimated that employee theft costs American businesses $400 billion a year. The risk has also increased about eight times in the past ten years. This represents an increasing problem that costs a lot of money. Without the purchase of bond insurance a small business will definitely fail to protect their assets and that of their clients.
The first step towards protecting a business from internal threats is to purchase crime insurance. There are two different types of coverage. There are first-party bonds and third-party bonds that cover different aspects of employee dishonesty.
First-party bonds protect a business against wrongful acts committed by an employee on purpose. These acts could be something like fraud, theft, forgery or any real untruth. A first-party bond insurance policy protects your business’ property from wrongdoings. There is employee robbery, forgery, extortion or computer fraud. These can result in thousands of dollars in damages for the business owner. First-party bond insurance is a type of policy that covers money, securities, and other property of your business from criminal acts by employees.
When a crime occurs in the workplace, 80% of the time it is an inside job and an employee is to blame. There are purposeful errors in billing, check tampering, expense reimbursement, and skimming from the payroll. The finance and accounting employees are the ones most likely to commit a crime and the ones who have the most opportunity to commit a workplace crime. This can be avoided by thoroughly checking employee backgrounds before hire and being vigilant while on the job. Auditing employees’ actions is recommended for any small business owner. There is also a federal program called ERISA that covers acts of employees that have access to the insured business’ employee benefit plans. This protects any major crime from affecting too many futures.
Third-party bonds represent protection from employees for your client’s goods. It could be from the same acts that first-party bond insurance protects but it extends protection offsite to your client’s possessions and funds. It even gets triggered if there is an allegation of theft or wrongdoing by an employee. If employees have access to a client’s financial information there is a significant risk that you as a business owner can be held liable for. Third-party coverage allows you protection if something were to go wrong. It also covers a situation where contractors or independent consultants are hired on a temporary basis. Any wrongdoing or theft done by those temporary employees are generally covered under a third-party crime insurance policy. A small business most in need of fidelity insurance is generally those that deal in money. An accounting firm that has access to a client’s pension fund is in great need of third-party bond insurance. They have access to important financial information and potentially millions of dollars. The insurance policy will protect a small business from the flaws of their employees. Third-party insurance is especially important because it protects the reputation of a business along with the financial safety of that business.
The name “fidelity bond” might confuse a business owner but it is more of an insurance policy that covers acts of “infidelity”. Statistics show that fraudulent acts are part of almost any business practice. This is a serious problem and represents a huge risk for small businesses. Employee theft is a crime but more than that it can have huge financial repercussions that could never be recovered without the help of a fidelity bond policy. Bonds are still insurance policies, but they are specific to acts of dishonesty. This is why it is also called crime insurance. Crime insurance could also be called commercial crime insurance.
The amount and type of crime insurance policy can vary significantly among different kinds of businesses. The types of services offered as well the types of employees a business has all play into what type of coverage is offered in the form of fidelity bonds. certain types of crime insurance need to be under separate insurance forms and policies, while others can be grouped together under one policy. There are many forms of fraud that fall under the Insurance Service Office’s general fidelity bond insurance. Employee theft, forgery or alteration, inside the premises theft of money and securities, outside the premises theft, computer fraud, and funds transfer fraud are covered under this large umbrella policy.
Inside the premises theft is a term that covers most crimes committed on company property. Most of the crimes that are covered under bond insurance are inside the premises theft. The opportunity for fraud and theft are just more common on the premises of a small businesses. Crime insurance is targeted towards manufacturers, wholesalers, distributors, professional firms, and service businesses, but it is a good idea for any small business to have crime insurance because of the risk of inside the premises theft.
Outside the premises theft occurs off company property, usually with clients’ property. Distributors and service businesses are in need of this coverage because of lot of their employee’s time is spent off company property with clients. The most opportunity these employees have to commit fraud or theft is offsite. Companies with frequent off site visits should have solid bond insurance that specifically covers off the premises actions.
Customized bond insurance is one of the necessities of most small businesses. Especially if you offer a specialized service, it is important to tailor your bond insurance policy to your services and employees. Each small business has a different business profile and different risks associated with that. Some businesses can be insured for up to $25 million dollars. Others have such little risk of fraud that they only need a policy that is around hundreds of thousands of dollars. The limit of coverage depends almost entirely on your potential losses as well as the likelihood of fraud. It is suggested that a business have a limit high enough to cover the maximum exposure and liability possible. Preparing for the worst will help you feel more secure. As a small business owner it is essential to cover your tracks and insure your business and the actions of your employees and their potential “infidelity”.
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