We often read or hear media reports involving theft of funds entrusted to the care of volunteers or employees. Frequently, not-for-profits such as fire and rescue companies, baseball, soccer and other sport associations have tens of thousands of dollars stolen by individuals unable to resist the temptation to divert funds when no one is looking. However, it is not just nonprofits that are the objects of such thefts. Physician practices also find themselves being victimized.
For example, “Woman Pleads Guilty to Stealing $783,000,” was the headline of a recent newspaper article detailing the theft from a local ophthalmology practice by its business manager over a 10-year period. This theft might have continued, except that the bank at which the practice maintained its account discovered certain irregularities and notified the practice. The employee was fired, subsequently pleaded guilty to charges of fraud and, according to the article, will likely receive a three-year prison term. The physicians in the victimized practice say they have learned their lesson, and have changed their policies and procedures as a result of the loss they suffered.
While strong internal controls, including such things as an employee code of conduct and separation of duties among employees responsible for a practice’s finances, are important, the lack or failure of such controls need not result in a severe financial loss for a practice. Although perhaps not as well known as other kinds of coverage, there is a type of insurance that is available to practices that can protect them against the sort of fraud described above. Specifically, such insurance, known as “Employee Dishonesty Coverage,” enables a practice to insure itself against, and recoup, financial losses it suffers as a result of employee theft. However, based upon our experience, many practices are unaware of the existence of Employee Dishonesty Coverage, and are also unaware that such coverage may be purchased at reasonable rates.
Physicians and their practices are often more concerned with Professional Liability Coverage (a/k/a “Medical Malpractice Insurance”) rather than General Liability (“GL”) Coverage. But, Professional Liability Coverage does not provide any relief when an employee steals funds from a practice. Rather, Employee Dishonesty Coverage can be added to a GL Policy.
In addition to such things as the building, fixtures and portable equipment, additional coverage can be purchased when there is a risk of employee dishonesty. Employee Dishonesty Coverage insures against employee theft of money, securities or property, and can be written with a per loss limit, a per employee limit or a per position limit. Employee Dishonesty Coverage can be one of the key coverages provided in a Commercial Crime Policy, but is more frequently found in a GL Policy. Working with a team of risk management professionals and your insurance agent, a practice is likely to have a Business Owner’s Package Policy (BOP). Within the BOP, coverage can be added either by scheduling a specific employee position or having blanket coverage with a list of employees, including those having access to the practice’s finances.
When Employee Dishonesty Coverage is purchased, the insurer will often recommend loss control techniques. Loss control is a risk management technique, seeking to minimize the possibility that a loss will occur or reduce the severity of those that do occur. Therefore, the insurer may be able to assist in developing stronger internal controls by defining checks and balances, oversight and separation of duties, as opposed to having all of the bookkeeping functions rest with one employee of the practice. In short, multiple sets of eyes and ears are better than one.
Employee Dishonesty Coverage may also contain a cooperation clause, requiring an insured to assist its insurer in providing information about a claim necessary to validate a loss, and may also involve cooperation with law enforcement. If an insured fails to provide loss-related information, it can jeopardize its right to recover, even if it has obtained Employee Dishonesty Coverage as part of its GL Policy. For example, in a recent Pennsylvania case, Fair, Inc. v. Assurance Company of America, 2007 Phila. Ct. Com. Pl., Lexis 276, defendant-insurer Assurance Company of America (“Assurance”) filed a motion for summary judgment, seeking to dismiss the complaint of plaintiff-insured Fair, Inc. (“Fair”). This case arose out of the loss by Fair of $110,000 in funds as a result of the actions of two of its board members. While the policy in question provided coverage up to $50,000 for each loss due to employee dishonesty, in order to recover for such loss, Fair was required to notify Assurance of any such loss “as soon as possible” with “a detailed, sworn proof of loss within 120 days” of discovery of the loss and “cooperate with [Assurance] in the investigation and settlement of any claim.” After finding that Fair had failed to provide such sworn proof of loss within the 120-day period required by the policy, the court granted Assurance’s motion for summary judgment and dismissed Fair’s complaint, with prejudice.
While it is important for a practice to obtain Employee Dishonesty Coverage, as the above case demonstrates, it is equally important after such coverage has been obtained and a loss has been suffered that the insured honor its duty of cooperation with its insurer or run the risk of forfeiting its right to recovery in spite of such coverage.
As an alternative to Employee Dishonesty Coverage, some practices may find it appropriate to purchase a Fidelity Bond – an insurance product similar to Employee Dishonesty Coverage that also acts to indemnify an insured against losses caused by theft by an employee or third party, such as an independent contractor providing billing, management or accounting services to a practice. But, if a practice has knowledge of fraudulent activity by a particular employee or third-party prior to the issuance of a fidelity bond, the practice may be precluded from recovering for any losses caused by such employee or third party, as the case may be, as fidelity bonds typically cover only those losses discovered during the period that such bond is in effect (see e.g., The Investment Center v. Great American Insurance, 2006 U.S. Dist. Lexis 21625).
In addition, Employee Dishonesty Coverage will not protect a practice against theft by an employee involving things other than cash or securities (e.g., checks or bank drafts). For instance, a practice that suffers the loss, through employee theft, of medication or other supplies it has purchased, will not be able to submit a claim seeking reimbursement of the value of such medication or supplies under its Employee Dishonesty Coverage. Rather, these are property losses that would be covered under a practice’s BOP.
Working together, the practice’s attorney, accountant and insurance agent can assist in determining the types of coverages and amount of per loss limit that is reasonable for the practice in light of its income; and while fraud may not be prevented, a practice’s physicians can take comfort in knowing they have better and tighter controls, and appropriate insurance coverage in the event of a loss due to theft.
Carl Anthony Maio is a partner in Fox Rothschild LLP’s Corporate Insurance Practice. He can be reached at 215-918-3616 or firstname.lastname@example.org. William L. Weiner is a partner in Fox Rothschild LLP’s Health Law Practice. He can be reached at 215-918-3635 or email@example.com.