Using A Captive For Employee Fidelity Coverage

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company

  Commercial General Liability Policies (“CGLs”) either provide no coverage for employee theft or have a very low maximum payout.  This is unfortunate, because embezzlement is common.  Consider the following points from a 2012 report by the Association of American Fraud Examiners:

1. The typical organization loses 5% of its revenues to fraud each year.
2. The median loss in the cases in their study was $140,000. More than one-fifth of these cases caused losses of at least $1 million.
3. The frauds lasted an average of 18 months before being detected. 
4. Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/ executives was $573,000, the median loss caused by managers was $180,000, and the median loss caused by employees was $60,000.
5. The longer a perpetrator had worked for an organization, the higher fraud losses tended to be. Perpetrators with more than 10 years of experience at the company caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000.
6. Most occupational fraudsters are first-time offenders with clean employment histories. 

     The conclusions raise a number of disturbing possibilities, such as:

1. A company loses $50,000 for every million dollars of revenue.  That means a company with gross revenue of $10 million could have $500,000 in losses.
2. It takes more than a fiscal year to find the fraud; for example a fraudulent scheme that begins now (February 2016) probably won’t be detected until August 2017. 
3. Higher ranking and longer tenured employees steal larger amounts of money.
4. Background screening doesn’t help to prevent this from happening.

  ​Employee fidelity is a very common captive insurance policy for all the above stated reasons.  If you would like to learn more, please contact us at 832.330.4101.