D&O Coverage as a Partner in Crime (and Fidelity)

By | April 5, 2010

While high-profile crimes like Bernie Madoff’s $65 billion Ponzi scheme generate headlines, employees at companies across the county are committing smaller, low profile crimes every day.

Many employee theft schemes — which typically go on for years — don’t make the TV news but they are being concocted more often and their costs are mounting.

The “Marquet Report On Embezzlement,” published by the Boston-based law firm Marquet International, found that the total loss in 2009 was $417.6 million, up 8.3 percent from the $385.6 million for 2008, when Marquet says its data may have been incomplete. Marquet examined 415 embezzlement cases with more than $100,000 in losses in the United States in 2009.

“It is amazing that we had a pool of more than 400 cases to examine from 2009, which means that on average, there was a major embezzlement case in the news each and every day last year,” said Christopher T. Marquet, CEO of Marquet International.

According to Marquet, the average embezzlement loss in 2009 was more than $1 million; the median was $386,500. Financial services along with government agencies face the highest risk for a major embezzlement. Twenty-five percent of all losses are in insurance and financial services sectors combined.

Two-Fold Effect of Economy

The recession is having a two-fold effect; it has invited more crimes even as it has helped uncover some.

“Employee misconduct and internal corporate fraud will be a continuing and growing problem as the U.S. economy continues to struggle. The seeds of future major embezzlements, yet to be discovered, are being sown in the current market environment,” the report says.

More embezzlers are being caught today. “Corporate fraud schemes tend to reveal themselves when organizations pay more attention to their finances,” according to Marquet.

Melissa Schwartz, an assistant vice president with Liberty International Underwriters, specializes in fidelity and crime insurance, which protects companies from employee theft. Schwartz agrees that the economy is contributing to cases.

“A lot of companies have gone through downsizing, bankruptcy filings, M&A activity. There’s a lot of uncertainty out there,” she told Insurance Journal in a recent interview. “Also, some companies, in order to cut back and save money, have decreased what they spend on internal controls and that provides opportunity as well. So there’s a perfect storm for fraud to be committed.”

She also agrees today’s heightened scrutiny of financial reports has spotlighted cases that might have otherwise remained hidden.

“Absolutely… Everybody started to examine their books more closely, just to make sure that they were OK. Certain employee-dishonesty type activities were uncovered that might have continued to go on undetected had the economic crisis not occurred,” Schwartz says.

The frauds often involve faking an identity, according to Schwartz.

“[There is] fictitious payroll, meaning an employee in an accounting department can set up a ghost employee and start siphoning funds off into a bank account set up under this false employee.” She sees vendor fraud. as well.

Ties to D&O

Because she wants to see professional liability professionals work more closely with people in her field, Schwartz recently took her fidelity and crime expertise to a Professional Liability Underwriters Society conference.

“Most fidelity departments are tied into an overall management-liability department, meaning we work with D&O underwriters as well as E&O [errors and omissions] underwriters,” says Schwartz.

She says that it’s good business sense for D&O pros to understand fidelity.

“The way the market has gone, the way insurance companies are run, a lot of D&O carriers have a combo form, which encompasses D&O, EPLI, fiduciary liability, as well as fidelity. So there are D&O underwriters out there writing private-company D&O, and they also have to underwrite fidelity,” Schwartz says.

“From a cross-marketing standpoint, from the fact that we all work together, from the fact that anytime an economic crisis happens, not only does it affect the D&O and the E&O policies, the liability policies, it does affect fidelity, and I think people should understand more about what we’re doing.”

Schwartz suggests that it’s a crime that many D&O brokers don’t know much about fidelity coverage.

“There are a handful of fidelity specialists in the industry, on the broker side and the underwriting side. But for the most part, what I find is I spend a lot of time trying to educate some of the brokers who call me up. They’re mostly D&O or E&O brokers, and they know that they have to also place the fidelity or the crime, and they rely on the underwriters to help educate them. They simply don’t know enough, or enough about the risks that their insureds are exposed to.”

“Today’s Fidelity & Crime Insurance Market,” a video interview with Melissa Schwartz of Liberty International Underwriters on Insurance Journal TV at www.insurancejournal.tv/videos/3329/

From This Issue

Insurance Journal West April 5, 2010
April 5, 2010
Insurance Journal West Magazine

Directors & Officers Liability; Entertainment/Sports/Special Events; Group Products for P&C Agents/Benefits Brokerage Directory

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