Bonding: Protect Yourself from Employee Theft
By Michelle Collins | December 31, 2001
In a perfect world, employee theft would never happen. Unfortunately, it does. To protect yourself, bonding assures that employees are trustworthy. And, if something should go amiss, it will be replaced.
Dictionary.com defines bonding as "an insurance contract in which an agency guarantees payment to an employer in the event of unforeseen financial loss through the actions of an employee."
How important is bonding? "The latest statistics we have is one-third of all bankruptcies are caused by employee theft," says Marc Leclair, former Assistant Vice President of Corporate Risk with London Guarantee in Toronto, Ont.
[Ed. note: London Guarantee was acquired on March 21, 2002 by the St. Paul Travelers Companies, Inc. of Saint Paul, MN.]
When you need to bond your employees
The insurance industry is currently in the habit of providing policies that bond employees from the very beginning of their employment, says Leclair. Bonding early on may prevent greater loss down the road. "Statistically speaking, the employees most likely to steal from you are the longstanding employees who have been with you for 10 to 15 years. The employees that have been at the same position for years understand the accounting system to the point where they can actually play games with the numbers without you seeing the changes. Once the theft and fraud has been going on to a certain time and size, then it's too late for the corporation to come out of it."
Employees who have been convicted of fraud in the past are not usually able to get coverage. If you still want to seek coverage for these people, Marc suggests asking the underwriter of the insurance policy or company if they would be willing to provide an exception for that individual. If you are able to have this employee bonded, they may be required to provide more specific and detailed information to the insurer than your other employees.
What to ask for
What happens if an employee does steal from you? "You should inform the insurance company the instant someone has stolen. The assets of the individual should be frozen, and police action needs to be considered," says Leclair. He adds that the claim would then be transferred to a specialized adjuster who would help you collect on the claim.
Employers can use the fidelity bond to protect themselves from theft. There are three basic types of fidelity bonds that you can apply for. Of course, the more specialized your coverage is, the more you'll pay.
Name Schedule Fidelity Bond
You designate a set amount of coverage for a list of employees that you provide for the insurance company. Each time you hire a new employee, you have to contact the insurance company to have that person added to the list, if you choose to do so. Collection under this coverage hinges on absolute proof that an employee did in fact steal from you.
Blanket Position Bond
Under this type of bond, you specify coverage for a position rather than the individual. Each employee of a business is covered, and new employees are added automatically. Coverage is offered for each employee up to the maximum set out in the insurance policy. Blanket position bonds don't require proof of the individual responsible for the theft.
Primary Commercial Blanket Bond
Like the Blanket Position Bond, this bond covers each employee in the company. This type of coverage does not accommodate each employee, but rather treats the employees as one unit. In other words, it does not matter if one or five people were involved in the crime, you will be able to claim the same amount.
Who to turn to
Fidelity bonds are available through insurance companies. Ask your insurance broker for advice on which coverage you should get. "Typically, the insurance broker will approach several insurance companies and will determine who has the best coverage and the best price for the operation of that client."
If you are just starting your business, Leclair recommends having bonding coverage added to your overall business insurance policy. "Those companies can typically add the fidelity coverage for a nominal cost in the two- to three-hundred-dollar range per year," he says. "That's a bare bottom minimum, and it can go up from there."
Before you sign on the dotted line
Before you have your employees bonded, Leclair says that it is absolutely essential to use all of the tools available to you to do background checks. This can include anything from checking references to conducting aptitude testing. "Some of them will determine the propensity of someone to defraud the company."