This is the conclusion to our three-part series.
METHODS OF ARRANGING COVERAGE
The first basic choice in arranging coverage is in deciding if the dishonesty coverage will be on a blanket bond or crime blanket position bond. As an example of the implications of these choices, consider a $250,000 loss caused by three employees. If coverage is on blanket bond form with a $100,000 limit, the insurer will only pay $100,000. If a blanket position bond were purchased with a $100,000 limit, the coverage limit available for the acts of these three employees is $300,000, and the entire $250,000 loss would be covered. While this application of the limit in the blanket position bond is advantageous, the coverage is, of course, more expensive than a blanket form.
A name schedule form as it suggests covers the employees named on the bond. A position schedule covers all employees for those positions scheduled on the bond. The limit of liability applies per employee or position. Deductibles apply in the same fashion.
One primary distinction between the blanket and schedule forms is who can be defined as an employee. While the blanket definition of an employee includes persons the insured directly compensates or directly controls while employed by an employment contractor, it excludes independent contractors and agents. The schedule forms identify the specific employees or positions which are covered without being restricted by this definition. This enables a business to name agents or contractors as covered “employees.”
A government entity has one added decision not available to businesses in deciding whether to obtain faithful performance coverage or employee dishonesty coverage. Even though the broader faithful performance coverage costs more than dishonesty coverage, many public entities choose this option.
Another major choice is what other common crime coverages are needed. Forgery or alteration; theft, disappearance and destruction; and computer fraud are frequently needed given modern business exposures. With respect to protecting property other than money and securities, a fourth choice is involved in deciding if robbery and safe burglary offers enough protection, whether premises burglary should be added, or whether the broader premises theft and outside robbery coverage is desired. In addition, individual businesses may have exposures for protecting securities and valuables stored off premises or for covering their liability for guest property stored on their own premises. Specialized crime coverages exist to address those needs.
STRUCTURING COVERAGE
Most businesses are interested in obtaining the maximum benefit out of crime coverages. Many times that means they seek out the highest, broadest coverage possible. While there is nothing wrong in that approach, it does not always adequately care for the needs of a business. For example, when two or more related businesses separately purchase crimes coverages, it can mean duplication. Also, in certain instances, insurers may be unwilling or it may be impractical to write high blanket limits that cover exposures generated by a particular employee or a particular position. These situations call for tailoring coverage to the individual business’s needs.
One need is common to many businesses. Many businesses have profit-sharing, pension programs, or employee 401-K programs. The Employee Retirement Income Security Act (ERISA) requires welfare, pension plans, and 401-K programs to be protected for dishonest acts at a limit at least equal to 10 percent of their assets subject to a maximum limit of $500,000. In addition, no deductible can apply to the bond covering such plans. The definition of an employee must also include natural persons who are directors or trustees while handling funds, or persons who are trustees, officers, or employees of the plan.
To meet these ERISA requirements, the Welfare and Pension Plan ERISA Compliance endorsement can be added and the benefit plans can be named as insureds on the crimes policy. The limits must still be carefully selected to be certain they comply with ERISA requirements.
Some positions are more sensitive than others simply because of the duties involved. If a few employees have access to a large amount of assets, excess employee dishonesty coverage for specified employees or a blanket excess limit may be used on top of existing dishonesty limits to provide added protection. An individual bond may also be used. An individual bond may be particularly useful as an alternative to remaining uncovered when an employee is involved in a minor dishonesty loss and the insurer writing the blanket bond is unwilling to reinstate coverage on that employee.
The arrangement of coverage can be tailored to the needs of an insured whether that means covering a valued employee that made a mistake or protecting sensitive exposures. Tailoring coverage usually means a lower cost than buying high limits that are really only needed on a few employees.
LIMITS
The correct limit is difficult to select. Dishonesty losses occur infrequently, and good loss statistics are not readily available. That makes it difficult to predict what might be expected on the basis of individual or industry-wide experience.
The Surety Association of America has published a chart to help select minimum bond limits. The table is first used to estimate an “exposure factor.” The exposure factor is 20 percent of current assets plus 10 percent of annual revenue. Once the exposure factor has been determined, the suggested minimum limit is obtained from reading across the table. For example, a total exposure factor of $2.5 million to $3.3 million suggests a minimum bond limit of approximately $250,000 to $300,000.
An employee theft can occur over time and can reach enormous levels. While dishonesty is almost never expected, it is a common source of surprise and disappointment. The disappointment can often be for the damage done to the employer’s sense of trust as much as for the very real loss in learning coverage levels are too low. Realistic assessment of a business’s exposure to loss offers the best means to combating fidelity loss.
At The Gaudreau Group, our professionals are well positioned to ensure that all of our clients weather any market conditions. Being part of the Renaissance Alliance allows access to superior Business Insurance options and expert Risk Management services. Through a network of more than 90 offices located throughout New England, we can offer you all the advantages and clout of a large national insurance company while providing you with personal accountability and localized services. The Gaudreau Group has innovative solutions, such as our Group Captive Insurance program, that empower our clients to reduce, control and profit from business insurance costs. With virtually every carrier and program underwriter within our reach, we can easily provide our clients the most efficient and cost-effective review…IN ANY BUSINESS CLIMATE.
