Protection for your clients from Fraud An overview of the insurance coverages available, risk

management techniques and the claim process.

August 8, 2012 Presented By: Todd Whiteman Vice President Property/Casualty

Overview

Fraud

- Definition:

- Who can commit fraud?

- Types of fraud:

- Expenses:

- Coverages:

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Crime of obtaining money or some other benefit by deliberate deception

Employees, Board Members, 3rd parties, Clients

Employee dishonesty, computer fraud, funds transfer, forgery, alteration, money orders, counterfeit currency and theft

Crisis Management, Investigative Costs and Public Relations

Can be purchased as a separate “Bond” often called a Fidelity Bond, as a separate Crime policy or as part of the Property Policy or Directors & Officers Policy

Employee Dishonesty

Employee Dishonesty

-Definition: Theft by an employee or group of employees

- In 2000 employee dishonesty cost US business over $50 billion dollars. In 2010 that number was estimated at $2.9 trillion globally –according to a report by the Association of Certified Fraud Examiners

- Includes theft of money, securities and property

- Options available include scheduled policies for an individual or location, blanket for all employees and locations or by specified position

- Can include theft from clients, 401k funds, employees and executives

- The limit of coverage is per occurrence meaning all acts involving the same person/group of persons and coverage is triggered when the loss is realized

- Coverage can also be extended to cover Volunteers and Interns as employees

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Employee Dishonesty

Types of Employee Dishonesty

- Embezzlement – Employees taking cash directly or forging signatures on checks and depositing in their own accounts

- Expense Account Padding – charges for personal items, meals and expenses or inflation of the cost of legitimate expenses

- Non Existent Vendors – setup of fake vendors and invoices for those vendors in order to pay themselves

- Inventory and Property Theft – items stolen for personal use, outside sale or scrap sale for value of material

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Additional Exposures

Computer Fraud and Funds Transfer

-Theft by an individual via computer hacking and password theft

- Access gained to bank accounts online via username and password resulting in a wire transfer

-Routing information changed on a legitimate payment to a different account

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Theft

- Definition: theft by a person or persons who are not employees

- On Premises (coverage for theft of money at your location)

- Off Premises (coverage for theft of money outside your location for deposit)

Additional Exposures

Money Orders & Counterfeit Currency

- Fake checks that may or may not be on actual bank check format

- Fraudulent or Modified Money Orders

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Forgery & Alteration

- Checks drawn and signed by someone not authorized to do so

- Forgery of existing checks, drafts or promissory notes

Unauthorized Business Card Use

- Personal use of business credit cards

- Theft business credit cards

Prevention

Policies and Procedures

Segregation of duties (different person responsible for money coming in and money going out as well as check writing authority and auditing)

Mandatory 2 weeks vacation annually

Multiple signers on checks

Annual audit by a 3rd party / accountant

Background Checks on new hires

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Risk Management

Insurance Policies

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Coverage

Fidelity Bond – covers policyholders for losses that they incur as a result of fraudulent acts by specified employees.

Crime Policy – covers policyholders for losses that they incur as a result of employee dishonesty, embezzlement, theft, forgery, computer fraud, counterfeit currency etc. This policy is designed specifically for these coverages and is typically the most comprehensive and can provide much higher limit options.

Property / Package Policy – same as above but included in a “Package” that also includes Property & Liability. Base limits are available and can be increased depending on options available from the insurance carrier.

Directors & Officers Policy – provides coverage to the organization, it’s Directors and Officers and it’s Employees for a wide range of suits. Many carriers will provide crime options as separate coverages and with separate limits on this policy.

Turning in the claim and what to expect

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The Claim Process

Most importantly, remember this is most likely the first claim like this that your client has ever had – there will be a lot of questions and concerns. Also many individuals take employee dishonesty and fraud claims as a personal attack and are often defensive in the beginning of the process

Step 1 Fact Finding – an initial overview of the situation including what, when, where and how need to be reviewed. Every detail does not need to be determined as that could take considerable time, but much information can be discovered immediately.

Step 2 Contact Attorney – some firms will have in-house counsel, most will not but they should contact them for assistance. In no way should this counsel act at this time, only provide guidance.

Turning in the claim and what to expect

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The Claim Process

Step 4 Contact The Authorities – this would be done after discussion with the attorney regarding the specifics of the claim. There are times were an attorney may advise against contacting the authorities.

Step 3 Protect The Organization and Mitigate The Claim – review all accounts, remove the individuals access or do anything else that will protect the organization from further harm.

Step 5 Contact Insurance Agent – all information gathered up to this point should be shared with the insurance agent. The agent will advise the next steps including turning in the claim to the insurance carrier. It may be best at this juncture to turn in a notice of potential claim depending on the situation as it is possible there will be no actual claim in the end.

Turning in the claim and what to expect

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The Claim Process

Step 8 Claim Closed – the client will be reimbursed for any out of pocket expenses that are covered and all parties involved will have received payment.

Step 7 Ongoing Claim – at this point all parties will have been properly notified and all will be working together to gather data as each party sees fit. This process can take quite a bit of time, possibly years depending on the specifics of the claim. At this time other parties may be brought in to assist including accountants and fraud examiners

Step 6 Duties In The Event Of Claim – Review the terms and conditions of all policies available including requirements for coverage. Many policies require the police are notified and provide time frames for various steps. (See attached examples)

Directors & Officers

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Directors & Officers

Often overlooked in the initial stages of a fraud claim is Directors & Officers insurance. It is recommend that any time there is a claim made against an organization or a situation that arises that is of concern to the board, the D&O policy must be thought of and the insurance agent advised of the situation for the following reasons:

Definition of potential claim in the policy Reporting period and reporting conditions

Often, claims for lack of management supervision, lack of proper procedures or inaction or poor judgment by the board are uncovered during the fraud investigation which may result in a D&O claim. Most likely the D&O coverage will not cover the theft or fraud, but will provide coverage for the suit against the organization or the board including defense costs.

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Contact Information

Todd Whiteman Vice President Property Casualty Nonprofit Insurance Specialist Enscoe Long Insurance Group, LLC 80 Emerson Lane, Suite 1305 Bridgeville, PA 15017 412-206-0364 twhiteman@enscoelong.com www.enscoelong.com