Uncovering Fidelity Claims: Employee Theft, Policy Coverage and Loss Quantification

Andrew McCarthy (00:09):
Hello, and welcome to the Imperium Risk Brief. I'm Andrew McCarthy, manager at Imperium Consulting Group. Today I'm pleased to introduce my colleague, David Gardiner is Senior Director with Imperium. David has extensive experience handling fidelity claims, and in this episode, he'll give us a quick introduction to fidelity claims and what organizations should know when dealing with them.

David Gardiner (00:28):
Hey, thanks for joining me, Drew.

Andrew McCarthy (00:29):
I think a good place to start, Dave, is what is fidelity coverage and how does it differ from other claim coverages?

David Gardiner (00:35):
Yes, so a fidelity policy can include multiple types of coverages. Some of the things you might find in there are employee theft, forgery claims, computer fraud, funds transfer fraud, credit card fraud. But today, I think what would be best use of our time is to focus on employee theft claims.

Andrew McCarthy (00:55):
Do you find that employee theft is the most common instance for a fidelity claim?

David Gardiner (01:00):
It's certainly the most common that comes across our desk for us to analyze. I have worked a number of other types of claims that include computer fraud and funds transfer fraud. They're just fewer and far between. I think you find that employee theft is the most common out there.

Andrew McCarthy (01:16):
Okay, got it. Before we dive into the quantification of a loss, what are some of the key items that need to be addressed when you're reviewing a fidelity claim?

David Gardiner (01:24):
Yes, first off, it's pretty similar to other types of insurance claims. You want to take a thorough review of the policy. You want to do that to determine the coverages and the types of limits, whether there was continuous coverage and for how long, and any kind of exclusions or other items that might impact your analysis. I think the policy review is the first thing you should do.

Andrew McCarthy (01:48):
If you remember, we had that claim a few months ago with that hospital group, and if I remember correctly, that claim extended over a five-year period. So in terms of the policy, how is fidelity coverage work?

David Gardiner (02:02):
Yes, you might recall that some of the policies cover a 12-month period, which is the case for fidelity. However, if it's determined that an insured has continuous coverage for let's say 10 years, and your analysis of the theft covers a five year period, then typically the insurance carriers would allow you to quantify the theft claim over that five year period because you've maintained similar types of coverage over that timeframe. So you have coverage to go backwards beyond a year, but you're still stuck with the limit in the policy, the current limit, if that makes sense.

Andrew McCarthy (02:41):
Yes, that makes perfect sense. Dave, we talked about the policy, but what are some of the other key items that need to be addressed?

David Gardiner (02:48):
Yes, I think once you've gotten a clear understanding of coverage, the next thing you need to do is have a conversation with the insured and figure out the facts and circumstances, at least to the extent of what's currently known. You definitely want to confirm who the bad actor is and that they're actually an employee or a contractor. This is an employee theft claim, so you need an employee that stole something. It seems like common sense, but we recently had a discussion with a company that just completed a physical inventory count and identified huge variances to their book inventory. My first question was, okay, you have all these variances, do you believe these items were stolen, and if so, by whom? Or is it just a bookkeeping error? That was right at the initial part of our conversation, establishing how you have this theft, how you identified it, and then does it link back to an employee? It's difficult to have an employee claim without identifying the employee. Other things that I think you need to identify at the outset is the timeline of events, including some very specific dates. Like that employee that you've identified as the potential bad actor, when were they hired, when were they promoted into the position where they could commit the theft, and when were they fired?

Hopefully once you identified the theft, the insured took steps to fire them. I think you need to understand the date of discovery, which is an important date to coverage, because it typically starts and stops the clock. It stops all future potential losses, meaning once you discover the theft, the insurance carrier will not let you sit back and continue letting them steal. Coverage stops once the theft is discovered, and it also starts the clock because most carriers have you prepare and submit the proof of loss by a certain deadline, 180 days, whatever it is.

Andrew McCarthy (04:41):
Okay. Yes, got it. So let's say the employee has now been identified. What steps are taken to start calculating this loss?

David Gardiner (04:49):
Well, these bad actors, these employees or employee, they're committing a crime and as such, they've done their best to conceal the theft. Our job is to peel back that onion and figure out who was involved in the theft, what was stolen, where was it stolen from, how was the theft committed and when did the theft begin and get discovered and come to an end. These investigations, unfortunately, they don't come with a template or specific instructions. The investigations really rely heavily on the facts and circumstances of the case, and as you investigate, you follow the paper trail.

Andrew McCarthy (05:29):
Yes, that makes perfect sense. It's different than a typical claim prep in the sense that it's more about developing the story to support your narrative rather than the quantification. Do you think you agree with that?

David Gardiner (05:42):
Yes, every claim's unique to a certain degree. Our analysis can be impacted by a number of different things.

Andrew McCarthy (05:49):
What are some other factors that would impact our investigation and analysis?

David Gardiner (05:54):
Your analysis or your investigation might change based on what was stolen, whether it was assets of the company, inventory items, money securities, the way they would steal those things are very different. Our analysis and investigation would certainly be impacted on what is stolen. The type of company, if it's a nonprofit that has weaker internal controls and limited amount of employees, it may be easier for them to steal, but more difficult to document. If it's a Fortune 500 company, there's a lot of internal controls, and there should be a lot of paper trail or ways to identify who did it and how they did it by internal documentation and things of that nature. The length of time the theft occurred obviously can impact how you run your analysis. Who was involved? Was it one employee, or was it a group of employees that colluded together?

Even the types of documentation, I just alluded to this with the types of companies, some companies do not keep a sophisticated record keeping system and some do. That could impact our analysis. And the simple things like the availability of a witness or security camera footage, all of these things can help. If we see how the theft occurred on security footage, now we can start trying to document it through paper and video recordings and things like that. So, there's just a lot of different factors that are going to impact the way we conduct our investigation.

Andrew McCarthy (07:23):
Yes, it's certainly interesting, at least from my perspective as a younger individual in the industry, working on fidelity claims, it's different than your standard claim preparation. What you just alluded to, going through these paper trails and reviewing these video footages and seeing testimony and witness statements, that stuff is always really interesting to review. Thanks for diving into that and explaining each of those factors that go into the investigation analysis. To wrap this up for people listening, how can Imperium help in this process?

David Gardiner (07:55):
Yes, I think certainly as we discussed first off, knowing the policy and knowing what needs to be addressed are key. Assisting with the investigation. When it comes to us, the company already has an idea. I gave the example of the missing inventory with the book to physical. That company knew there was an issue and brought it to us. They didn't know much more than that, but they knew there was an issue. So, we can assist with their investigation now. We can help them conduct interviews, and we can help them with the interactions with law enforcement. Obviously, we can quantify the loss for them or assist in quantification of the loss, and then it becomes, once that's done, you have to present it to the carrier. Taking your analysis, your quantification of the loss, applying the policy, and then presenting it to the carrier in the proper format.

Once that's done, you have to navigate the claims process. The carrier may hire another expert, another forensic accountant. They may ask for documentation, additional documentation to what's already been provided in our package. Navigating that process, going through the questions, document requests, and trying to settle the claim. And if necessary, dispute resolution. You hope to settle every claim, but sometimes it gets elevated to a mediation or on a rare occasion a litigation, and we help companies all the way through that process.

Andrew McCarthy (09:17):
Thanks, Dave, for breaking down some of the fundamentals of fidelity claims. We hope this gives our listeners a clear understanding of how these claims work and why they're so important. I'm Andrew McCarthy with Imperium Consulting Group. Thanks for joining us on the Imperium Risk Brief, and we look forward to having you with us next time as we dive into some of the pitfalls and exclusions you could face when preparing employee theft claims.