Employee Theft Insurance covers the theft of your company’s property, securities, or money by employees.
What is Employee Theft Coverage?
Employee Theft Coverage, also known as Employee Dishonesty Coverage, protects companies from thefts committed by employees. This type of insurance covers many types of theft but is subject to a number of conditions and exclusions, which we’ll explain in this article.
Employee Theft Coverage is one of the key coverages under a commercial crime policy. The standard commercial general liability policy does not cover losses from employee theft. Any dishonest or criminal act by the employees, including leased employees, or owners, partners, and directors of the company which results in losses to the company will not be covered by the commercial general liability policy. Employee Theft Coverage fills a part of the gap left by commercial general liability policies.
Do I need Employee Theft Coverage?
Employee theft is a widespread problem that costs employers over $50 billion a year.1 Small and medium sized businesses accounted for about 68 percent of employee theft cases.2 The U.S. Department of Commerce estimates that 30 percent of business failures are caused by employee theft. Recessions and rough economic times, especially, increase the prevalence of employee theft due to the added financial strains on your employees.
Funds theft and check fraud are two of the most common forms of property theft by employees, but employee theft can take on many forms. It could be an employee stealing company products to sell on the black market, embezzling hundreds of thousands of dollars from company funds, or overinflating bills from third party vendors and receiving kickbacks from the contracted company. Although you may hope that the people you’ve hired will not break your trust by stealing from your company, protecting your business from dishonest actions by employees is critical to your financial interests.
What does Employee Theft Insurance cover?
Employee Theft Insurance covers the theft of your company’s property, securities, or money by employees. It could be theft committed by a single employee, a group of employees, or employees acting in concert with people outside the company. Employee Theft Insurance will typically cover a number of different potential crimes committed by employees of your company.
For example, when an employee:
- Steals your company’s products and sells them on Craigslist, covering up the discrepancy by fabricating the inventory count.
- Steals from your company’s supply room over the course of several years, which adds up to several thousand dollars worth of supplies.
- Steals cash from the cash register.
- Wires money from the company into her own bank account, which goes unnoticed because she manages the accounting department.
- Alters the paycheck that you issue for an amount that’s higher than their salary.
- Fabricates fake invoices for the company to pay out to a third party vendor that is actually a company set up by the employee in question.
- Creates a credit card account for the company and uses the funds to pay for personal expenses.
- Takes bribes or kickbacks from a vendor for overinflating the bill of the vendor.
- Steals customer information from your database and sells the names and contact information to a competitor.
- Submits timesheet hours for hours that were spent running personal errands.
What are the key conditions of Employee Theft Coverage?
Definition of “Employee”
It’s important to note that not everyone at your company will be considered an “employee” under Employee Theft Coverage. Employee Theft Insurance relies on a specific definition of “employee” to determine whether benefits will be paid out in the case of property theft.
In this case, an employee is any natural person:
- While in your service and for the first thirty days immediately after termination of service, unless such termination is due to “theft” or any other dishonest act committed by the “employee”;
- Whom you compensate directly by salary, wages or commissions; and
- Whom you have the right to direct and control while performing services for you.3
All three of these conditions must be met in order for someone to be defined as an “employee” of your organization. Importantly, owners and partners of the company will not be covered as employees of the company.
The third stipulation on the “right to direct and control” has been the most litigated aspect of Employee Theft Coverage. Well-established legal precedents have also been set regarding other executives or shareholders of companies who operate without supervision from any other person, including the board of directors. In many of these cases, the executive/shareholder will not be considered an “employee.” Any theft involving them will not be covered under the employee theft policy.4
The president of a company embezzled millions of dollars from the company’s clients to pay for vacations and other personal expenses. The board of directors consists of the president and a few other members who have no supervision over the president’s actions. In this case, the president of the organization is not considered an “employee” and the theft he committed is not covered under an employee theft policy
On the other hand, the definition of employee is inclusive of many types of workers for your company, including:
- Former employees who are retained as consultants
- Substitute workers
- Seasonal workers
- Short-term workers
- Leased employees
- Students and interns (as long as they are being paid)
As more companies are now relying on independent contractors, you might be wondering if these workers would fall under Employee Theft Coverage. The answer is no. Be aware that independent contractors are not considered employees under Employee Theft Insurance and will not be covered if they steal from your company.
Loss Sustained vs. Loss Discovered
There are two ways that Employee Theft Coverage can be written pertaining to the timing of the crime:
Under a loss discovered form, the theft would be covered as long as it is discovered during the policy period of the coverage.
Your Employee Theft Insurance policy started at the beginning of this year. An employee embezzled $75,000 in the previous year and the theft was discovered in April of this year. Because it was discovered during the policy period, the losses would be covered by the insurance policy.
Under a loss sustained form, the theft would only be covered if it was sustained and discovered during the policy period of the coverage.
Your Employee Theft Insurance policy started at the beginning of this year. An employee embezzled $75,000 in the previous year and the theft was discovered in April of this year. However, because the theft did not take place during the policy period, it would not be covered by the policy.
What are the key exclusions of Employee Theft Coverage?
Aside from acts by owners or principals of the company and employees not covered by the definition, there are a number of other exclusions applicable to Employee Theft Coverage. They include:
Employees who have a known history of committing theft or fraud
Example: An employee was fired from her last job for stealing inventory which you knew about when you hired her.
The loss of future business income
Example: An employee sold trade secrets to a competitor company which results in a loss of potential sales in future years. Employee theft insurance will not pay out benefits for the speculated loss of future business.
Salary and benefits paid to perpetrator while he or she was committing the theft
Example: An employee embezzled several thousand dollars over the course of a year and earned $150,000 in wages over that same time period.
Employee Theft Insurance will not cover the wages you paid out to the dishonest employee while he was stealing.
Liabilities to third parties as a result of the theft
Example: An employee steals the personal information of your customers from your databases and sells them on the dark web. Employee Theft Insurance will not cover the cost of defending a lawsuit if your customers sue.
Example: You discover a shortage looking at the inventory of your company’s warehouse and find out that an employee has been stealing. Unless you can provide separate evidence for the discrepancy, inventory shortages that are calculated using an inventory or profit and loss calculation will not be covered.
Example: After your employee steals the information of your customers and breaches their privacy by selling them to identity thieves, you retain an attorney to advise you on legal issues related to this matter. Any fees or expenses-related legal action and lawsuits will not be covered.
Example: The business interruption loss that resulted from an employee stealing all of the computers in your office or the income you could have made by investing the stolen money, securities, or property.
Employee Theft Coverage is one of the most common types of insurance under commercial crime policies. Employee Theft Insurance covers many different types of thefts and many different types of employees, though notable exclusions are owners and partners of your company. Small business owners need Employee Theft Coverage to protect their companies from the very real and common risk of employee dishonesty—actions that could significantly impact the bottom line of your business.
 Statistic Brain Research Institute, Employee Theft Statistics, 2018
 Hiscox Embezzlement Study, 2017
[3, 4] Ed Fenton and Siwei Gao. Commercial Crime Insurance for Coverage of Employee Fraud