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8 North King Street
Northampton, MA 01060


1Nov. 2013

When Honesty as the Best Policy Fails

It's been fifteen years since I took over the role of President of Webber and Grinnell. I remember combing through our agency financial statements and production reports, wondering how in the world we would pay off all the debt it took to purchase the business.

Each month I would carefully analyze our results and track our progress. It didn't take long for me to have most of those numbers stored in my head. The more I understood about the relationships between bank statements, production reports, financial statements and current accounts reports, the more questions I had. Things were not adding up. Something was out of balance.

I confronted our 20+ year bookkeeper about some reconciliation issues and insisted on sitting with her while she took me through the process. As we started to look at some accounts, she broke down crying and admitted that some personal issues had interfered with her work and she was way behind in reconciling the statements with our carriers.

I decided to carve this process out of her position and asked my commercial lines manager to dig into it. A week later my bookkeeper gave her notice citing personal issues again.

It didn't take long for my commercial lines manager to uncover a deceitful chain of journal entries on our books. Cash payments from customers at our front desk were not making it to the bank and offsetting journal entries covered the trail. After comparing our bank deposits to our cash receipt books (which we luckily had in a box on the top shelf of our supply room), we realized that this scam had been going on for at least 10 years.

While our business had been hit hard, we were fortunate to have a sizable employee dishonesty insurance policy. After our insurance company conducted a lengthy examination of our books, we received a check for the amount of the policy limit.

Throughout my career in the insurance business, I have seen many similar cases. While business owners insist that they have the checks and balances in place to prevent such a crime, they don't realize that situations can change. People, positions, and procedures change over time and each change can give rise to an employee theft exposure.

Moreover, employees who steal from their employers are usually motivated by an addiction or habit they need to support. This means that they are not hoarding the money they steal, but spending it as fast as it is pilfered. When the company discovers the theft, there is often little or nothing that the company can recoup from the employee. Employee dishonesty insurance can make the difference between a total loss and a mitigated one.

Employee dishonesty coverage can be purchased by itself, or in combination with several other crime type coverages. Typical limits range from $500,000 to $1,000,000. A modest amount of employee dishonesty coverage is often included in a standard package policy. Carriers will provide $5,000 - $50,000 in a policy broadening endorsement. The rates for employee dishonesty coverage depend on the type of business and the number of employees.

I suggest you check your policy to see if you have this coverage.

The loss to our company put a significant financial strain on our agency for many years. Additionally, it was hurtful to those that had trusted the bookkeeper for so long. We were very fortunate to have a policy in place and I believe the coverage is a critical component to any business's risk management plan. Receiving the check from the insurance company helped me begin to heal from the ordeal.


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