Crime Insurance and the Distinctions between Fidelity Bonds, Liability Coverage, and Errors and Omissions Insurance
Every year, employee theft collectively costs US businesses around $50 billion. Almost 70% of cases occurred in small or midsize companies, which lost a median amount of $289,864, while bigger businesses hemorrhaged $1.13 million on average. Even worse: incidents like this generally require specialized insurance, which many founders and CEOs don’t realize they need—or decline.
Thankfully, startups can protect themselves. Read on to discover how to manage this risk and others with crime coverage.
How is crime insurance different from liability insurance?
Crime insurance can cover startups from intentional criminal activity committed by employees. Many different types of business insurance do not cover this, as it can create a moral hazard. Take property insurance policies: nearly all don’t cover arson. (Otherwise, property owners in a bind could strike a match, burn their building down, and collect money for it.)
But businesses have some unique cases like employee dishonesty: stolen cash, equipment, retirement plan assets, forgery or alterations, and computer fraud, etc. Crime insurance can help with these potential issues.
What are fidelity/ERISA bonds and how do they differ from fiduciary liability insurance, and errors and omissions (E&O) insurance?
Crime insurance and fidelity/ERISA bonds are like bourbon and whiskey: all bourbon is whiskey, but not all whiskey is bourbon. In this case, “crime insurance” is the umbrella term—and the bonds and liability coverage are subsets of it.
Fidelity/ERISA bonds cover crime and other deliberately fraudulent acts committed by employees against a firm’s retirement plan and other benefits. The policies are taken out for specific individuals or a team that oversees these assets—and they’re mandatory if you sponsor a retirement plan.
Liability insurance covers issues like injury to a person or damage to property. E&O helps with lawsuits and other losses to a customer or third party who suffers economic harm because of a professional service provider’s mistake. So it could, for example, cover a tax-software company that had a coding error, which resulted in big tax penalties for its customers. Both these types of insurance apply to entire businesses, unlike fidelity/ERISA bonds that cover specific employees.
Is there a standard suite of coverage founders should consider? And does that change over time?
No one-size-fits-all approach exists for insurance. It’s all about tailoring your coverage to manage your specific risks. That said, many startups begin with property insurance, then add liability insurance when they lease an office or join a coworking space. (In fact, landlords often require this.)
From there, coverage often evolves at inflection points like hiring your first employee, which can create the need for benefits-management. It can also have workers’ compensation implications, depending on where you’re based. Funding rounds are also great opportunities, as are launches of a product or service, especially if your business involves customer information you need to protect.
Basically any time you’re celebrating a big milestone, that’s a good opportunity to reflect on your insurance coverages. In particular, startups often announce they’ve got new funding rounds to attract talent and partnerships, and build their brands. That’s absolutely a cause for celebration, but you’ve also just announced to the world, “Hey, I’ve got big bucks in the bank!” So a venture-capital raise is a good time to review your insurance and remind your employees about cyber security best practices.
Founders may also want to consider specific cybercrime policies, which cover things like social engineering attacks. These con jobs involve convincing someone to hand over money or assets. For example, an employee receives an email, seemingly from their boss, CEO, or CFO. It says “Very urgent—a vendor account is overdue. Wire them $50,000 with these new account details today. Don’t bother trying to call me, as I’m in meetings all day. But this needs to be handled ASAP.” No one breaks in and steals anything per se. But a crime still occurs—and incidents are on the rise, sadly. The FBI notes that complaints about social engineering attacks rose by about 70% between 2019 and 2020.
What’s the difference between first-party crime insurance and third-party?
A crime insurance policy is generally designed to cover internal losses like if a company suffers theft or fraud. Third-party coverage can address when something bad happens to an external person, like a customer, and it’s your company’s fault. An example of a first-party crime is if a startup has their banking credentials stolen by an employee; an example of a third-party crime would be if a startup works with a contractor or vendor and has their banking credentials stolen by that outside vendor.
With that in mind, do you need first-party and third-party crime coverage? Every company with employees has risk exposure to embezzlement, fraud, and theft, and could benefit from first-party crime coverage. A company may need third-party coverage if their contractors are going to customer sites/premises on the customer’s behalf, and these contractors have access to sensitive client information like retirement plans and banking accounts. Think of an online marketplace for gig workers, for example. If a gig worker visits a customer’s home and commits a crime, the customer could sue both the criminal and the online marketplace for the crime that occurred. In this instance, third-party crime coverage could cover the costs of legal fees and damages.
Should you have any questions on this, speak to an insurance advisor for more information.
What are the most common barriers to startups getting crime insurance?
Some founders and CEOs don’t realize they need specific crime insurance policies—they assume their existing coverage applies to crimes. But it does not necessarily.
Others have trouble believing their employees would make mistakes or steal from them.
It can be useful to research—or speak with an expert—about scenarios and whether you can afford to be wrong, especially where contracts and federal regulations are concerned
The biggest converts to insurance tend to be people who didn’t have it...and then the unthinkable happened.
How else can an insurance professional help?
Founders tend to be builders, technologists, or business people, first and foremost. They always have a million projects in-flight. An insurance specialist has just one job: understanding your company and helping you identify its potential pitfalls.
Sometimes firms just respond to external pressures, taking out insurance as contracts—like leases or vendor agreements—require it. But the landlords or clients creating that paperwork are protecting their businesses, not yours! An expert can conduct a risk assessment and help you be proactive about protecting your startup specifically. They can also flag policy exclusions, which could include items like virtual currency and indirect losses (the inability to profit after an incident). An expert can also advise you about your responsibilities and claim-reporting requirements, if something does go wrong.
For example, insurance companies need to be notified when businesses get served with lawsuits, so they can organize the defense. You can’t just get sued, handle it, and then send in the bill for reimbursement.
Are there particular sectors that tend to be uninsured or underinsured when it comes to crime coverage?
Problems can crop up across the board. But companies in fintech, investing, and financial services should be especially careful. The same goes for businesses that have large retirement plans.
Now is an important time for founders to be extra vigilant. The second year of the pandemic has left some people more financially desperate, while increasing isolation because of remote work in many sectors. So crimes could potentially go undetected longer, especially for companies that don’t share fiscal responsibilities or have solid audit trails.
The impacts of being uninsured or underinsured can be immense—even to the point of your business closing. Crime coverage can manage this risk and bring peace of mind.
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