Managing the Risk Related to the Rogue Employee Through

InsuranceFraud Insurance and Fidelity Bonds

Lincoln Caylor, Partner

Bennett Jones LLP416-777-6121

March 9, 2011

"For whom they insure it is sweet to them to take the monies; but when disaster comes, it is otherwise and each man draws his rump back and strives not to pay."

- Francesco di Marco Datini, Florentine merchant writing to his wife in the 14 th century, in Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein pg. 95 quoting Lloyd's of London: An Illustrated History.

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OUTLINE

• Coverage

• Exclusions

• Making a Claim

• Conducting an Internal Investigation

• Responding to Insurer's Investigation

• Recovery3

COVERAGE

Employees Covered • Generally:

• Natural persons engaged in service of the insured in the ordinary course of business

• May not cover: • Contract workers, volunteers, temps • Officers, directors• Terminated employees

• Terminated employees covered • 30 - 60 days or not at all post-termination

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COVERAGE

Requisite Intent • Does an employee have to intend to defraud?• No default position

• Some policies are silent on intent • Others require "manifest intent"

• Sometimes coverage extends even when employee cannot be specifically identified

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COVERAGE

Definition of Loss• Generally includes:

• The monetary value of what has been taken

• Can include: • Costs to establish quantity of loss • Lost interest• Costs of proceedings to recover assets

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COVERAGE

Temporal Coverage• Generally

• losses occurring in a prior period where they are discovered in the current period

• Coverage may require: • Uninterrupted coverage from loss to discovery• Coverage limit from time of loss• Loss carryover to current period • Loss under terms of previous coverage

• Limitation on discovery period

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COVERAGE

Territorial Coverage

• Commercial area of operation

• Potential for broader coverage

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COVERAGE

Preserving Coverage• Have systems beyond inventory, profit or loss

calculation in place to quickly detect and calculate fraud or loss• Regular checks and audits, limited access to cash, and

redundancy mechanisms

• Carefully plan investigation to identify and preserve evidence to substantiate the claim

• Be cognizant of all deadlines and be sure to act within them

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EXCLUSIONS

Definition of Loss• Generally excludes

• Losses caused by employees that Insured knows have previously been involved in fraud, theft, or dishonest act

• Sometime s previous theft must have occurred at Insured's business

• Sometimes minimum dollar value of previous theft ($25,000)

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EXCLUSIONS

Definition of Loss• Unique Exclusions (vary by policy)

• Aggravated, exemplary or punitive damages owing

• Legal fees and other costs to establish loss (varies greatly)

• Costs of data repair

• Loss sustained by theft from client of insured by employee of insured

• Loss on an induced asset sale

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EXCLUSIONS

Effect of Collusion Among Partners• Generally no coverage if fraud/theft in collusion

with partner of insured

• Definition of partner varies between policies• Member of a partnership• Officers of a corporation • Members of a joint venture

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MAKING A CLAIM

Notice Requirements Upon Discovery • Generally on Insured:

• specified time to report notice of loss upon discovery

• Can be 60-90 days

• Sometimes unspecified or "whenever practicable"

• Sometimes Insured must report loss to police when loss results from violation of law (fraud, theft etc.)

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MAKING A CLAIM

Notice Requirements Upon Discovery

• Generally on the Insurer: • Obligation to follow notice with provision of proof of

loss

• Must be within 60 days by Insurance Act s. 135

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MAKING A CLAIM

Notice Requirements Upon Discovery• Insured must submit sworn proof of claim

• Timelines vary between 4 months - 6 months

• Litigation cannot be started for 60 days following submission of proof (Insurance Act, s. 136)

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MAKING A CLAIM

Discovery and Proof of Loss • Discovery of loss

• Audit or 'tip-off'• Other internal investigation

• Determining quantum of loss • Undefined• Market price• Investigative specialist • Inventory computation

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CONDUCTING AN INTERNAL INVESTIGATION

• Engage counsel early for benefit of solicitor-client privilege

• Develop a plan• Who is involved, what evidence is available, how to

preserve that evidence

• Whether or not required by the insurance policy, consider contacting police

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CONDUCTING AN INTERNAL INVESTIGATION

• Gathering Evidence• Start collecting internally available proof—email,

hard drive• Collect internal evidence in possession of the

employee—Anton Piller order

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RESPONDING TO INSURER'S INVESTIGATION

Obligations of the Insured • Employee background checks (consider if this is

something to do in advance)

• Can be cross-examined on sworn proof of loss

• Requirement to cooperate with investigation

• Notify police authorities

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RESPONDING TO INSURER'S INVESTIGATION

Benefits of Engaging Law Enforcement• Prosecution can act as deterrent to other

employees, showing real consequences associated with theft and fraud

• Employer may be able to obtain a restitution order in sentencing

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RECOVERY

Recovery Payments • Generally funds recovered are paid to the

Insurer less costs of recovery

• Insured may be able to allocate recoveries to • Losses incurred in excess of their liability limit • Losses specifically excluded in the Fidelity Bond • The amount of the deductible

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CONCLUSIONS

• Complex and varied coverage available

• Coverage can be tailored to specific businesses

• Expect rigorous adjusting process

• Careful compliance required with all steps to successfully make a claim

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Questions?

Thank you!