Chapter 9 – Crime
Claims
Crime Losses
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Under property
policies, crime is usually covered under policy broad forms, because commercial
named perils policies do NOT cover the peril of theft
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When a claim is
reported, the loss adjuster must determine if the loss is perpetrated by an outsider
or whether an employee is suspected
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Bonds are guarantees
that the persons named in the body (like an employee) will perform their
obligations as described
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When an employee stole
money from an employer, the employee would be in default of the bond and
therefore designated as the "defaulter"
Role of the
Adjuster
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A- Analyze and review
the policy wordings to determine coverages
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I - Investigate the
claim; the loss adjuster must collect as much information about the loss as
possible through the use of interviews, requesting and collecting
documentation, requesting, collecting and reviewing any evidence that supports
the alleged theft; the loss adjuster will take the information collected and
review if any policy conditions still exist that affects coverages or if the
policy will respond to the loss
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E- Evaluate the
damages; the insured has the burden of
proof to substantiate the value of the claim;
the loss adjuster through the investigation will determine the value of
the claim and verify documentation submitted by the insured to establish the
reserves and settlement amount
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N - Negotiate the value
of the claim; commercial insureds are savvy about insurance law and are in a
position to determine the amount of loss better than the loss adjuster; the adjuster must support any settlement
amount with facts and any concession must be hard fought
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S - Settle the claim; Part of the negotiation process is to come to
a final settlement; once done then the appropriate documents need to be
furnished to the insured for review and signature(s) to bring the matter to a
final close
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When first meeting with
the insured in any claim, the loss adjuster must explain their function and
role; the loss adjuster must discuss the
terms and conditions of the policy or bond with the insured at an early stage
to ensure that obligations and conditions of coverage are understood
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The loss adjuster must
be alert to all recovery possibilities;
restitution by court filings or promissory notes signed by the defaulter
are options used to subrogate the amount paid to the insured from the defaulter
Claim Coverage Issues
Employee
Dishonesty Coverage and the 3D Policy
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3D = Dishonesty,
Disappearance, and Destruction
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This type of policy is
used to cover employee dishonesty, crime exposures, and physical damage to
money and similar property for commercial risks
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This policy is usually
added as a rider/endorsement to property and liability coverage in a package
form
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The five (5) insuring
agreements usual to a 3D policy are:
·
Dishonesty coverage
with a per-loss aggregate or per employee limit
·
Loss of money or
securities inside the insured premises for destruction, disappearance or
wrongful abstraction
·
Loss of money or
securities outside the insured premises for destruction, disappearance or
wrongful abstraction
·
Loss caused by
accepting money orders and counterfeit paper currency
·
Loss caused by cheques
issued by the insured by depositor's forgery
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Endorsements may cover
other perils and property like burglary and theft of merchandise, stolen
company credit cards, forgery of incoming cheques, extortion by threats to
people or threats to products or property or computer fraud caused by outsiders
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Coverage for employee
dishonest applies to losses sustained during the policy period; discovery
period, the time in which the claim can be reported, is extended for up to two
(2) years after the policy expires
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Superseded
Suretyship Agreement - losses that
occurred during the term of prior policies, but were discovered after the
reporting window under the prior policy was over are covered; i.e. the time to
report a claim is extended beyond the policy period up to the discovery
period; claims that are reported after
the discovery period extension will NOT be covered
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Employee dishonesty
could be covered under an aggregate per-loss limit; no matter how many
employees are involved in the loss, the specified aggregate limit would prevail
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Employee dishonesty
could be covered on a per limit per employee basis, whether the employee acted
alone or in collusion with others; deductibles are usually applicable on a
per-employee basis
E.g. The insured was able to prove only one of its employees was dishonest causing the loss. The insured suspected other employees but was unable to prove an collusion between the identifiable defaulter. The insurer held coverage on a per-loss limit for only one employee, even though there were others suspected
E.g. The insured was able to prove only one of its employees was dishonest causing the loss. The insured suspected other employees but was unable to prove an collusion between the identifiable defaulter. The insurer held coverage on a per-loss limit for only one employee, even though there were others suspected
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Dishonesty policies
require that insured notify the insurer immediately upon the discovery of a
covered loss
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Discovery Date
·
needed to assess if
coverage applies
·
"discovered"
is when the insured has reasonable knowledge that a loss under the policy has
taken place; the questions to ask is if
a reasonable person would assume, from the relevant facts, that a loss has
occurred
·
suspicion that a loss
has occurred does NOT add up to be "discovered"
·
The insured is granted
a grace period in order to discover losses after a policy expires; usually 30
days (part of the superseded suretyship agreement) after the policy expires
·
This extension is
provided to the insured because dishonest employees will conceal their wrongful
action and it will take time for management to uncover the necessary evidence
to support any claim of dishonesty
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Ordinary employees
might know something about an employee's dishonesty but this may not qualify as
knowledge of the insured
Example - A theft of money by an employee was discovered by a clerk in the same store. The clerk failed to report the incident to his/her superiors. This would not be considered discovery on the part of the insured since the clerk failed to take actions even though they knew
Example - A theft of money by an employee was discovered by a clerk in the same store. The clerk failed to report the incident to his/her superiors. This would not be considered discovery on the part of the insured since the clerk failed to take actions even though they knew
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Late notification of a
claim could result in the insurer to become prejudiced by the event and could
cause the insurer to question coverage under the policy; late notification could also cause more
losses as dishonest employees will usually continue dishonest acts until some
sort of action is brought forward to stop him/her or them; it is the insureds duty to mitigate the loss
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Manifest Intent
·
used in fidelity
insurance policy to emphasize that mismanagement and ordinary business risk are
excluded
·
this clause emphasizes
that the employee's intent to commit fraud must be clearly evident
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Loss by unidentified
employees; the insured may not be able
to attribute fraud or dishonesty to a particular employee but it will be enough
for the insured to show that the loss could not have happened without employee
involvement
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Exclusion under the
policy is for losses that are only supported by inventory computation or a
profit-and-loss calculation; the insured
must establish the theft or employee dishonesty through evidence wholly or separately
from such computation or calculations
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Another exclusion are
property of others; a person who is not
a party to the contract would not be in a legal position to enforce it
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Other exclusion both
direct and consequential from the policy are:
·
fraudulent activities
committed by the insured themselves
·
potential income
because of the loss
·
interest and dividends
lost because of the loss
·
cost incurred by the
insured to prove the existence of the loss or amount of loss suffered
Theft of Stock
and Equipment Coverage
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Stock (as per
CBES Form)
·
to include merchandise
of every description usual to the insured's business
·
includes packaging
material, wrapping and advertising material
·
also includes property
belonging to other as long as the policy holder is under obligation to keep the
property insured or is legally liable for such property
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Excluded property are:
·
Money
·
Precious metals
·
Securities
·
Stamps
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Any settlement for
stock is guided by the principle of indemnity which states that the insured is
to be put back into the same financial position prior to the loss; no more and
no less
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The amount of
settlement will be least of the following:
a) ACV
of the property at the time of the loss
b) Interest
of the policy holder in the property at the time of the loss
c) Amount
of the insurance specified on the Dec Page for the property that was damaged
due to the loss
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A loss is calculated on
merchandise that is destroyed by determining the owner's cost in replacing it
regardless if the cost is greater or less than the cost of first acquiring it
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Extra cost that may be
included in calculating the replacement stock are:
·
Cartage and freight
incurred (transportation and delivery)
·
Less any discounts for
cash purchases
·
Purchase of replacement
stock from another competitor
·
Cost of receiving,
marking, and replacing the merchandise on shelves or elsewhere
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Producers like fish
canners replace the product except by purchasing it from another producer
because such raw materials are subject to seasonal availability
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Depreciation may apply
to shopworn merchandise, obsolete merchandise or otherwise unsellable
stock; some stock may actually
physically deteriorate because of its age and this should also be applied
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Mysterious
disappearance or shortage of equipment or stock discovered on taking inventory
is excluded; there must be an
explanation for the loss and not simply it is not able to be accounted for as a
result of taking inventory
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Extension in coverage
will cover damage caused to the building by a theft as long as the insured is
liable for the damage and this damage is not covered by another policy, like a
landlord policy if the insured is a tenant
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Coinsurance clause may
apply as a loss penalty if inadequate amounts of insurance is purchased;
generally coinsurance penalty is waived for losses that do not exceed 2% of the
amount of insurance or the amount does not exceed $5000, whichever is less
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Unsold stock is valued
at its ACV at the time of loss
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Sold stock is valued at
its selling price with proper deductions for any discounts
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Property of others in
the custody of the insured is valued for the amount the insured is liable up to
the ACV; allowances for any labour and
material expended up until the time of the loss
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Tenant improvements and
betterments are valued at ACV at the time of the loss
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Most CBES Forms have
warranties in place and the insured must keep up on the warranties for coverage
to apply; the adjuster must review the
policy wordings to determine what warranties were in place and if the insured
complied in following them
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The types of warranties
that may apply to an insured operating a furrier or jewellery business are:
·
The alarm system must
be maintained in full working order at all times
·
The alarm system must
be engaged when the premises are closed
·
A panic button must be
installed at certain strategic locations at the premises
·
Panic buttons must be
maintained in full working order at all times
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A theft of stock or
equipment from a locked vehicle warranty will require the following criteria to
be met in order for the claim to be covered under the policy:
·
Vehicle unattended
·
Vehicle shows signs of
forced entry
·
Vehicle doors and
windows were securely locked prior to the theft
Principles of
Investigating Crime Losses
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Review "Role
of the Adjuster"
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Crime losses can be
divided into two (2) categories with regards to who perpetrated the loss. These categories are:
i. Strangers
committing the theft
ii. Employees
or other persons hired by the insured committing the theft
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A fidelity bond is an
agreement to answer for the debt of another;
the insurer guarantees to the employer that the employee will perform
his/her job honestly; if the employee
commits an dishonest act which result in the employer to suffer a loss the
insurer will answer for any debt owed to the employer
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There are three (3)
parties to a bond:
·
The principal (the employee)
·
The guarantor (the
insurer)
·
The obligee (the
employer)
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The 3D policy will
cover employee dishonesty and usually responds to losses of money and
securities
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Theft of stock will be
covered by the CBES Broad Form
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The general areas of
proof that must be shown by the insured in the event when items are stolen are:
·
Value of the items
stolen
·
Existence of the items
·
Ownership of the items
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When a claim is
submitted by the insured the insurer is obligated to provide the insured with a
blank POL; by providing a blank POL to
the insured the insurer is NOT admitting liability under the policy
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The insured does NOT
have to use the forms provided by the insurer in order to submit the claim ,
however, the forms provided by the insurer will ask the right questions and the
answers given will adequately represent the claim being presented
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The insured is required
to submit the completed POL within a stated time frame, however the insured can
request an extension in deadline if the circumstances require it; the insured can also submit an interim POL
and a final POL at a later date
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Once the completed POL
and supporting docs have been received from the insured, the loss adjuster will
examine them carefully to determine whether the claim has been adequately
proven; most often the documentation
supporting the claim is received before the completed POL
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An employee who has
been wrongly dismissed for stealing from the company has the right to sue the
employer for wrongful dismissal; the
insurer can NOT be pulled into such an action as long as the adjuster remains
focussed on collecting evidence that is required under the policy
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The onus remains on the
insured to prove the claim
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Robbery
·
Situation where
violence is inflicted upon custodian
·
Situation where fear of
violence exists
·
Custodian was injured
or rendered unconscious
·
Showcase was broken
into during regular business hours
Stock Theft
Investigation
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When a theft loss is
submitted under the CBES Form the loss adjuster must ensure the stolen goods
are not excluded under the policy and also check for any restrictions that may
apply
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Most policies will
require the insured to notify the police
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The loss adjuster
doesn't conduct a criminal investigation, that is the work of the police; the
loss adjuster simply conducts an investigation that will determine if the loss
is covered under the policy or not
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Often the loss adjuster
may have access to video images that actually record the crime; some policies will have warranties that
require the insured to have CCTV monitoring and that such monitoring be functioning
at all times
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Once it can be
confirmed that a theft did occur, documents like financial statements, general
ledger, first detailed inventory list, tax returns, and other such documents
can support the value of the claim
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Some insureds will
devalue their stock for tax purposes;
they apply a fixed depreciation value every tax return which may not be
truly reflective of the value of the stock
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The loss adjuster
checks a stock loss when stock is stolen by:
·
reviewing records that
establish the loss
·
acquiring data showing
what inventory the insured started with; the difference will determine the
amount of loss for ending inventory data
·
determining if
inventories taken before the loss were reliable and accurate
·
were inventory records
certified by an accountant?
·
were unit prices of
stock tested?
·
were adjustments
required for obsolete stock? (inventory of stock will have a certain percentage
of obsolete or damaged items; in accounting this is known as "allowance
for obsolescence")
·
determine if any
unusual transfers or acquisitions were made recently?
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The loss adjuster
should question stock purchased from a distant supplier versus a closer
one; a reason should be solicited from
the insured in a claims situation; there
may be a informal relationship between insured and supplier and there is a
possibility that there was collusion between the parties for the presented
claim
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The loss adjuster must
also keep in mind that record keeping could be in error, and this could account
for the inventory shortage; if the
inventory claim is presented on a lump sum basis rather than by an item-by-item
checklist, a loss cannot be confirmed
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The loss adjuster
always has the right to question the validity of the claim for which there is a
lack of documentation.
Example - when there has been no documentation submitted to support the claim, when there was no forced entry into the premises, when the insured failed to report a crime to the police, when the burglar alarm was not functioning and the insured failed to notify the insurer, then the adjuster has a duty to investigate more thoroughly to validate the claim
Example - when there has been no documentation submitted to support the claim, when there was no forced entry into the premises, when the insured failed to report a crime to the police, when the burglar alarm was not functioning and the insured failed to notify the insurer, then the adjuster has a duty to investigate more thoroughly to validate the claim
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The loss adjuster
should be vigilant in checking any careless inventory practices that have been
used by the insured to present an employee dishonesty claim for a fidelity
bond. The insured must provide:
·
reasonable proof that a
dishonest act occurred
·
internal records can be
used to prove the amount of loss but NOT used to prove a dishonest act occurred
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The loss adjuster
should know whether stolen stock was seasonal;
if the insured was able to prove a theft occurred then the value of the
stock could fluctuate as seasonal stock will have a higher value during peak
season versus a lower value in the off season
Employee
Dishonesty Claims Process
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Once a report from the
insured is received by the insurer the following are the steps the adjuster
assigned should take to handle the claim:
a) Adjuster
meets promptly with the insured; the loss adjuster should inform the insured
that the required POL will be shown to the alleged default; this forewarning to the insured will make the
insured carefully document the claim and
not put in their own comments about the alleged defaulter; the loss adjuster should let the insured know
that the facts of the claim are important and opinions of the alleged defaulter
should not be part of the claims file
b) Adjuster
will wait to interview the alleged defaulter (employee) until the insured has
submitted a complete and signed POL; the
adjuster needs to have all factual details outlined in a POL in order to
affectively interview the alleged defaulter;
an interim POL can be completed by the insured to give enough factual
detail to the adjuster to undertake the interview with the defaulter
c) The
insured is required to properly complete and submit a POL form to the insurer
setting out in detail the particulars of any claim; the insured must submit the POL within a
specified time period following the discovery of the loss; failure to do so could be a technical breach
of the policy; unless the insurer is
prejudiced by this delay it will not affect coverage
d) Adjuster
should make it clear to the insured that any expenses/costs to prove the
employee acted dishonestly are NOT recoverable under the policy, also, until a
satisfactory POL has been submitted, no claim is payable by the insurer; the
contract requires that the insured maintain adequate books and records; failure
to maintain such records may give the insurer a defence to the claim
Interview With The Defaulter
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Arranging an interview
with the alleged defaulter without a documented POL could be detrimental to the
insurer's interests, because the loss adjuster would not be fully prepared to
properly interview the alleged defaulter effectively
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The role of the
adjuster is NOT to interrogate the suspected defaulter; that is the job of the
police
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The following steps
should be undertaken by the adjuster when arranging an interview with the
alleged defaulter:
i.
The loss adjuster
explains that s/he is representing the interests of an insurer who may have to
pay a claim based on the sworn POL submitted by the insured
ii.
The loss adjuster
should meet with the defaulter in an environment under the adjuster's
control. Interviewing an alleged
defaulter on his/her own home ground may present an element of danger to the
adjuster
iii.
At the beginning of the
interview the loss adjuster should provide warning that all comments and
statements could be used as evidence against the defaulter. Evidence gathered could also be used against
the insurer
iv.
If the defaulter wishes
to confess to the loss, the adjuster can take a written confession, noting in
the preamble of the statement that anything written within the statement can be
used as evidence against the defaulter.
The confession/statement should include a history of dishonest activity
and additionally should outline potential recovery prospects.
v.
The statement should be
witnessed by a TP or the adjuster, and the defaulter should initial all
corrections and sign the bottom of each page of the statement
vi.
With the permission of
the insured, the adjuster will allow the alleged defaulter to read the POL and
peruse any documentation supporting the insured's claim. This provides the alleged defaulter to
acknowledge or refute any wrongdoing, the amount of loss, or the nature of the
loss. Copies of the POL and any
documentation for the claims file should NOT be provided to the defaulter.
vii.
A copy of the accused
defaulter's statement can be given to the interviewee upon his/her request
Criminal
Prosecution
-
Fidelity Bond forms
used today do not require the insured to press criminal charges against the
defaulter in order to be eligible for coverage
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The insured will
benefit from police involvement and a full criminal investigation because of
the following reasons:
·
especially if the
insured's evidence, which is establishing the loss, is weak
·
the police have certain
powers and access to information allowing them to help in proving a loss
·
deterrent to other
employees who were considering similar dishonest acts
·
criminal prosecution is
how society punishes criminal wrong doers and shows the consequences of
criminal activity
·
restitution by the
courts as part of criminal sentencing will have the same results as a civil
judgement proceeding when recovering money from the defaulter, that was paid by
the insurer towards the insured's claim
Subrogation
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Once the claim
submitted by the insured has been adjusted and paid, the insurer has the rights
to any recovery through subrogation against the defaulter
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The adjuster may ask
the insured to execute a receipt and discharge form, confirming the terms of
the settlement and further acknowledging the insurer's subrogation rights
Recovery
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Most fidelity bonds
provide that when the loss exceeds policy limits the insured has the first
rights of recovery against the defaulter and any assets in the possession of
the defaulter
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The cost for pursuing
recovery are deducted from the recovery amount prior to disbursement to either
the insured or insurer
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The employer (insured)
can withhold moneys owing to a defaulter in the form of salary or expenses as a
credit to the loss
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Statute obligations,
vacation pay and pension benefits owing because of statute obligations cannot
be deducted from the claim unless the defaulter voluntarily turns over payments
to the credit of the claim
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Any deductible amount
outlined in the Dec Page will be the responsibility of the insured and will be
the very last item to be reimbursed in the event of recovery
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Promissory Note
·
Unconditional written
promise, signed by the debtor, to pay a specified sum at a fixed time or on
demand
·
By signing the
promissory note, the defaulter acknowledges the debt is owed to the insurer
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The promissory note
should make it clear that the debt is the result of fraud, and therefore cannot
be discharged in a bankruptcy
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The adjuster can also
pursue the option of seeking an additional guarantor, like a spouse or a
parent; the guarantor should be warned
to seek independent legal advice before making this commitment
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Assets acquired by the
defaulter using stolen money can be recovered in priority to other creditor
claims if it can be proven that the stolen money was used to purchase specific
assets
Example of how stolen funds are used - John is entrusted with his employer's bank account information and John directs payment from his employer's account into his own, without his employer's permission. John then subsequently withdraws this amount from his bank account and purchases a big screen flat panel TV from a dept store. Upon discovery of John's actions the employer submits a claim for employee dishonesty under the employer's fidelity bond. The insurer after receiving a completed POL from their insured and evidence showing what John did, were able to get a confession from John and a promissory note stating John will pay back the money due to his fraudulent activity. John is unable to pay and declares bankruptcy. The insurer, through the evidence, can seize the TV as proceeds of a fraud by going through the proper legal channels
Example of how stolen funds are used - John is entrusted with his employer's bank account information and John directs payment from his employer's account into his own, without his employer's permission. John then subsequently withdraws this amount from his bank account and purchases a big screen flat panel TV from a dept store. Upon discovery of John's actions the employer submits a claim for employee dishonesty under the employer's fidelity bond. The insurer after receiving a completed POL from their insured and evidence showing what John did, were able to get a confession from John and a promissory note stating John will pay back the money due to his fraudulent activity. John is unable to pay and declares bankruptcy. The insurer, through the evidence, can seize the TV as proceeds of a fraud by going through the proper legal channels
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There is also
possibility to recover from negligent parties like external auditors, the
insured's bank or anyone else whose negligence may have contributed to the loss