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Even though crime insurance is widely available at relatively low cost to protect companies from employee theft and dishonesty, many smaller and midsize businesses do not buy it—or, when they do, they often don't file claims because recovery requires that they prosecute the perpetrators, experts say.
“The large, jumbo companies are more likely to buy it, whereas the smaller companies tend to trust their employees,” said Doug Karpp, a vp at Hiscox Ltd. in Los Angeles.
This can be especially dangerous for small companies “because they have less sophisticated internal controls,” often resulting in later fraud detection and greater losses relative to the size of the organization, he said. “A $100,000 loss to a $3 million company is more damaging than a $100,000 loss to a billion-dollar organization,” Mr. Karpp said.
Lee McGriff, principal of McGriff-Williams Insurance, an independent insurance agency in Gainesville, Fla., said he has found that many small and midsize business owners are reluctant to buy crime coverage “because they trust their employees explicitly. But my experience has been that when this comes to roost, it's usually the most trusted employee who is the culprit.”
“The bigger the business, oftentimes the person handling insurance procurement may even be the one stealing from the company,” he said, citing a recent situation involving a law firm client that lost $600,000 in an embezzlement perpetrated by a finance department employee.
“She was prosecuted,” Mr. McGriff said, a requirement for filing a claim under crime insurance policies.
Crime policies respond to loss of money, securities or other property resulting directly from dishonest or fraudulent acts perpetrated by employees either acting alone or in collusion with others, said Chris Gilman, a managing director at Aon Risk Solutions in New York. The policies also cover loss of money or securities from their destruction, disappearance or theft while on the an employer's premises or in transit. Depending on the business operations, crime policies also may be extended to cover employee theft of a client's property when in the custody of the insured.
Some crime policies also cover telephone toll fraud, computer virus remediation and software licensing violations, Mr. Karpp said.
In light of the financial crisis, Mr. Gilman said he is seeing more interest in buying crime insurance among financial institutions and private equity firms.
Despite increasing losses attributable to the recession, the annual cost of crime coverage is competitive, brokers report.
For example, “if you're a private, middle-market company with $100 million in revenue and you want a $1 million policy with a $10,000 deductible, you could probably get it for $3,000 to $4,000,” said Matthew Crooks, assistant vp at Willis Executive Risks in Pittsburgh. And, “as the limits go up, the rates get cheaper.”
Mr. McGriff said he has sold employee dishonesty coverage to smaller firms with limits up to $300,000 for annual premiums of $500 when added as an endorsement to a typical business owner policy.
A former employee of San Francisco's Tenderloin Housing Clinic recently was arrested and charged with embezzling $29,000 in tenant rent money from the nonprofit organization, which operates the city's largest housing program for homeless adults.