Despite experiencing median occupational fraud losses of $140,000 each year and with more than 20% of victim organizations losing $1 million or more, many midsize companies are either uninsured or underinsured for employee theft risks, experts say.

The U.S. Chamber of Commerce estimates 75% of employees steal at least once, that the incidence of employee theft is 15 times greater than external theft, and that 30% of business failures are caused by employee theft or embezzlement.

Fewer than 16% of the companies that fell victim to employee theft in 2011 made a full recovery of their losses either through restitution, insurance claims or other means, according to the 2012 Report to the Nations on Occupational Fraud and Abuse published by the Austin, Texas-based Association of Certified Fraud Examiners. Between 40% and 50% of victimized organizations did not recover any of their fraud losses, the report found.

Moreover, most of the organizations that experienced high employee theft rates and losses use fewer anti-fraud controls than their larger counterparts, leaving them more exposed to such crimes, according to the ACFE study.

The industries most commonly victimized, based on the study, were the banking and financial services, government and public administration and manufacturing sectors. The vast majority of the frauds were committed by individuals working in one of six departments: accounting; operations; sales; executive/upper management; customer service; and purchasing.

“Small companies tend to have really bad fraud controls in general. They may not have the resources,” said John Warren, vice president and general counsel of the ACFE. “That makes them especially vulnerable.”

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And even though “it's a relatively low-cost way to get some coverage,” the fraud examiners association found through its research that many victims of employee theft are not insured for that exposure, he said.

“Everyone thinks it's the company down the street that gets defrauded until it happens to them,” Mr. Warren said.

In fact, most business package policies purchased by smaller organizations don't provide coverage for employee theft, unless it is added through endorsement for an additional premium, insurance experts say. But the limits of coverage typically are low, perhaps as little as $25,000, which is why most insurance brokers recommend companies in industries with high employee theft rates purchase stand-alone crime insurance policies with higher coverage limits.

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. The policies also cover loss of money or securities from their destruction, disappearance or theft while on an employer's premises or in transit. And depending on the type of business operation, crime policies also may be extended to cover employee theft of a client's property when in the custody of the insured.

“We get a lot of requests for coverage to pay for theft from employee benefit plans” since the Employee Retirement Income Security Act requires employers to purchase insurance to cover theft from their benefit plans, said Maura Verrone, vice president at ACE Commercial Risk Services in Atlanta.

However, “it amazes me the number of midsize employers that aren't buying this coverage to protect their operations from other types of employee theft,” said Keith Lavigne, senior vice president of ACE USA Professional Risk in New York.

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“Smaller insureds tend to bundle their coverage in packages, and the crime component is either very small or nonexistent,” said Chris Giovino, a partner at the New York-based forensic accounting firm Dempsey Partners L.L.C.

When crime coverage is purchased as part of a business owner's package policy, crime coverage is subject to “sublimits” that are significantly less than the total property coverage, said Steve Campo, senior vice president and management professional services practice leader at USI Holdings Corp. in Dallas.

As a result, companies that purchase crime coverage in a business owner's policy “are insured for the $50,000 loss but not for the catastrophic loss” of $1 million or more, he said. “That is the opposite approach that companies should take. They should do more due diligence, take a higher deductible and use the savings to buy a higher limit. You can get much higher limits on a standalone policy — a crime policy — that is nominally more expensive than the package policy,” Mr. Campo said.

For example, it may cost $500 or $1,000 for up to $250,000 in crime coverage in a business owner's policy versus $3,000 to $5,000 for $1 million in crime coverage limits on a stand-alone basis, he said.

Stand-alone crime coverage is more expensive for employers in industries with historically high theft rates, such as retail and financial services, than in consulting or other service industries “where there is no product and employees are most likely not dealing with their customers' assets or their customers' money,” said Lisa McAllenan, senior vice president at broker Lockton Cos. L.L.C. in St. Louis.

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The reasons many small and midsize employers don't purchase adequate crime coverage are myriad, said Eric Cernak, vice president at Hartford Steam Boiler Inspection & Insurance Co. in Hartford, Conn.

“It's a little bit of everything,” he said. “There are a number out there who say any more than they're spending now is too much and it's not worth it to them. There are companies who don't think they have an exposure. They may say 'I know everybody who works for me and know them all by name and they wouldn't steal from me' or 'I don't do business over the Internet, so I don't have any of these exposures' or 'I have coverage under my property policy.'”