In the last issue of Claims Canada, Education Forum reviewed the parameters of employee dishonesty coverage through the 3-D policy (Dishonesty, Disappearance, and Destruction) and fidelity bonds. This article follows up with an overview of the claims process in cases of employee dishonesty.
Quick off the mark
In a dishonesty claim, quick action by the loss adjuster can prevent further loss, help preserve evidence and enhance recovery opportunities. The adjuster should meet with the insured immediately following the report of a potential employee dishonesty loss.
Dealing with the insured: proof of loss
The insured must complete and submit to the insurer a proof of loss form setting out the particulars of the claim. The insured does not have to use the insurer's own forms (usually supplied by the adjuster), but many insureds will choose to do so in order to cover all the right questions. Furnishing blank proof of loss forms is not an admission of liability.
The adjuster should tell the insured the proof of loss will be shown to the alleged defaulter. The insured, thus forewarned, will likely be very careful in documenting the claim.
Until a satisfactory proof of loss has been submitted, no claim is payable by the insurer. A fidelity bond usually provides that the proof of loss must be submitted within a specific period of time. Although it will not affect coverage unless the insurer is prejudiced by the delay, failure to meet the deadline is a technical breach of the policy. An insured may choose to comply by filing an interim proof of loss.
The contract requires that the insured maintain adequate books and records, which must properly document and establish the claim. Poor records may give the insurer a defence to the claim, so it's important that the adjuster examine these materials.
Interviewing the employee: When and where
Although time is of the essence, loss adjusters often wait until at least an interim proof of loss has been filed before interviewing the employee.. Confronting an employee accused of theft is a serious undertaking, and the loss adjuster should be prepared with the factual details outlined in the proof. Arranging an interview earlier could be detrimental to the insurer's interests: without knowing the details of the loss, an adjuster is not fully prepared to interview the alleged defaulter effectively.
As a precaution, the adjuster should meet with the employee in a safe environment. Interviewing an employee on his or her home ground could potentially be dangerous if, for example, the employee reacts strongly to the accusation and becomes violent.
Content of the conversation
At the beginning of the interview, the loss adjuster should provide a warning that all comments and statements could be used as evidence against the employee. (They could also be used as evidence against the insurer.) The adjuster should explain he or she is representing the interests of an insurer who may have to pay a claim based on the sworn proof of loss submitted by the insured.
With the permission of the insured, the loss adjuster usually allows the employee to read through the proof of loss and any documentation. The employee can then acknowledge or refute any wrongdoing, the amount of loss or the nature of the loss. As a matter of practice, however, copies of the proof of loss and documentation are not provided to the employee.
It is the insured who alleges the accused took the money, and it is the insured who must prove the loss (often with the help of the police) -- it is not up to the adjuster to interrogate a suspected defaulter. But if the employee wishes to confess to the loss during the interview, the adjuster can take a written statement, noting in the preamble that anything written in the statement can be used as evidence against the employee. The statement should include a history of the dishonest activity and should outline potential recovery prospects. The statement should be witnessed, preferably by a third party or by the adjuster, and the employee should initial all corrections and sign the bottom of each page. A copy of the statement can be left with the employee.
Pros of prosecution
The insured may or may not be required to press criminal charges against the defaulter in order to be eligible for coverage. Either way, the insured will usually benefit from police involvement and a full criminal investigation. This is particularly true where the insured's evidence establishing the loss is weak. The police have the authority to request documents, such as banking records, that can help in proving a loss.
Prosecution also demonstrates the consequences of criminal activity to the insured's other employees: the public disgrace of the criminal and his or her failure to achieve any gain provide a deterrent to others. A third potential benefit of prosecution is that, in some instances, sentencing in the criminal proceedings may include restitution orders.
Once the insured's claim has been adjusted and paid, the insurer is subrogated to the position of the insured with respect to all rights of recovery. The insured is obligated to cooperate with the insurer in its attempt to recover the amount paid from the offender. The insurer enforces its subrogation rights in the name of the insured against any party from which recovery may be available.
When a claim is accepted, the loss 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.
For claims settled within the bond limit, the insurer has first right of recovery. Any deductible amount the insured was required to absorb is the very last item to be reimbursed.
Where the loss exceeds the policy limit, most bonds provide that the insured has the first right of recovery against any culpable persons and their assets. Normally the costs of obtaining the recovery are deducted from the recovery before it is paid out.
Specific recovery options include the following:
• As a credit against the loss, the employer can withhold moneys owing to a defaulter in the form of salary or expenses. However, vacation pay and pension benefits owing under statutory obligations cannot bewithheld-- they must be paid to the defaulter or beneficiary, although the defaulter may voluntarily turn them over to the credit of the claim.
• Specific assets acquired by the defaulter using the stolen money can be recovered by the insurer in priority to other creditor claims. The insured must be able to show how the flow of funds took place.
• The defaulter may be persuaded to sign a promissory note: an unconditional written promise to pay a specified sum at a fixed time or on demand. The wording of the note should make it clear that the debt is the result of fraud and therefore cannot be discharged in a bankruptcy. The adjuster should seek an additional guarantor to the note, such as the defaulter's spouse--but should warn the person to obtain independent legal advice before making this commitment.
• Finally, recovery is not necessarily limited to pursuing the defaulter. Depending on the circumstances of the claim, recovery may be available against the insured's external auditors, the insured's bank, or anyone else whose negligence may have contributed to the loss.
This article is based on excerpts from the study material in the Claims Professional Series of applied courses -a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.