Managing the Risk Related to the Rogue Employee

Managing the Risk Related to the Rogue Employee Through Insurance Fraud Insurance and Fidelity Bonds Lincoln Caylor, Partner Bennett Jones LLP 416 -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. 2

OUTLINE • Coverage • Exclusions • Making a Claim • Conducting an Internal Investigation • Responding to Insurer's Investigation • Recovery 3

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 covered • 30 - 60 days or not at all post-termination 4

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 5

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 6

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 7

COVERAGE Territorial Coverage • Commercial area of operation • Potential for broader coverage 8

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 9

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) 10

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 11

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 12

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. ) 13

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 14

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) 15

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 16

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 17

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 18

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 19

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 20

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 21

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 22

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