Millions of dollars are lost every year to employee dishonesty. This causes contractors to suffer severe financial damage.
Unfortunately, no construction company is completely protected from this. An employee’s motive to steal from an employer can range anywhere from greed to necessity. Even the most trusted employees can find themselves tempted to behave dishonestly.
For example, a contractor suffered more than $2 million in losses when a group of employees, who had ordering and warehousing oversight, stole copper wire over a four year period. They were able to take their copper bounty to a “burn barn” and cash out.
In another example, a CFO of a construction company discovered one of his project managers had created a ghost vendor for roofing materials. Company officials were so intent on winning the bid and completing the project on time, they did not notice that the project manager syphoned nearly $500,000 over the course of six months.
False sense of security
It can be easy to develop a false sense of security, especially if you are at a construction company. This comfortable state causes many decision makers to accept a watered-down version of protection or decline crime coverage altogether. Most brokers explain how crime insurance provides protection against a number of losses such as embezzlement, burglary, and robbery but will not show how theft is covered under a property policy. What they do not explain is how several types of property are usually excluded altogether or they are only covered for a nominal amount. For example, money and securities are excluded from most property policies.
Many construction-company owners are unaware employee theft is universally excluded under property policies. Additionally, policies provide coverage for “named perils” but do not typically include theft as a covered peril. Thus, they do not cover losses of equipment, materials, or supplies owing to burglary. This leads to contractors carrying additional risk, having unknown coverage shortfalls, and unknowingly agreeing to cover on their own possibly high-cost risks.
Because theft of materials, equipment, and other non-money property may be insured under property policies, owners may get lulled into having a false sense of security. Especially because most theft losses are done by an employee.
Employee dishonesty insurance
Theft of both money and property is a serious concern for contractors. Although most contractors will not keep a lot of cash on hand, they do run a considerable amount of money through their business and are thus vulnerable to theft from the inside.
Because theft of money and property by employees is excluded from coverage under virtually all commercial property policies, employee-dishonesty coverage is one of the more important crime coverages for contractors. Companies that claim not to need employee-theft coverage because they “trust their employees” are often the most vulnerable.
Protecting your company
Trusting employees will always be important for inspiring loyalty. However, too many owners put their company and future at risk simply because they are eager to show trust and they neglect implementing the proper controls. Who is to say you cannot demonstrate trust and protect your company at the same time? Here are some real-life claim scenarios from a large insurance carrier that were directly associated with construction companies.
An employee and a friend stole cable from inventory, which was then found sold to a local salvage yard. The employee, upon arrest, admitted he and his friend had been stealing the materials and selling it as scrap.
The carrier paid the construction company more than $70,000.
In another example, a CFO along with several associates, made an arrangement involving a local contractor. They planned to overbill an area hospital and kickback the difference to them. This loss exceeded $1 million.
Lastly, over several years, a property manager for a property management company approved duplicate payments to a firm. The $540,000 loss was ultimately paid for through the company’s crime policy.
Managing your risk
Employee-theft insurance is an indispensable component of your general risk-management system. The standard CGL policy quickly excludes employee-theft loss, making you the financier of this risk.
To make your risk-management system as strong as possible and avoid coverage shortfalls, find a broker with a construction specialty. Reject one-size-fits-all risk-management programs and start looking at things in new ways. By taking these steps, you won’t have to worry about the possibility of covering on your own a devastating loss in the future.
Eric Messe is a business and risk consultant at The Starr Group in Greenfield. Write to Eric at [email protected] or by phone at 414-421-3800 x 4829.