Managing the Risk Related to the Rogue Employee Through Insurance Fraud Insurance and Fidelity Bonds Lincoln Caylor, Partner Bennett Jones LLP 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 Terminated employees covered 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 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

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— , 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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