After a Loss Occurs

Fidelity claims have unique challenges compared to traditional first party insurance losses that make it difficult to collect the necessary facts to recover losses from an insurer. There are several best practices that organizations can follow.

First, it is important to understand the insurance coverage in place. There can be differences in policy provisions that have a material impact on putting together a claim and getting remediation from the insurer. It is vital to understand the requirements for reporting events and providing support for losses incurred. Some policies have requirements that potentially fraudulent events must be reported as soon as there is a reasonable probability that they have occurred. Depending on the insuring agreement, the time line required for submitting a proof of loss may not be significantly beyond the point of discovery.

Although there are other minor carriers, there are three major insurance companies that offer insurance policies to cover corporate theft events. Chubb and AIG both offer standard packages that have basic insurance provisions for different types of fraud events. For each of those respective events, there may be different insurance policy sub-limits that would apply.

Lloyd's of London syndicates also underwrite manuscript policies. Unlike the standard forms offered by others, this coverage may be customized depending on the nature of the business being insured. They may also include other aspects of coverage that are not addressed by standard forms. For a policy covering a financial institution, for example, there may be specific endorsements and sub-limits related to that business. Safe deposit coverage may protect against the loss of any item located in any safe deposit box of a customer that is in the custody of the insured. Loss of records coverage may cover the cost in reproducing critical information that is damaged or destroyed by any cause. Furthermore, certain costs (such as court costs and attorney fees), may be endorsed that could be specifically excluded under the standard forms previously mentioned.

Manuscript forms can be much more complicated in structure. But they may also be easier for an insured to work with in terms of making insurance decisions unique to their specific business type. Regardless, it is critical for every insured to understand what is and is not covered under their respective insurance programs prior to the occurrence of a fraud event.

In addition, certain recovery costs may or may not be included, depending on the policy. Expenses to investigate a loss, for example, can be a basic part of certain policies or may be added by special endorsement in others. This provision for payment of forensic accounting expenses is often overlooked, but it is important. The time and effort that it takes to investigate and prepare support for a fraud event can be significant, as well as the cost associated with it.

In order to trigger coverage, there must be support for the intent to commit the fraudulent act. The original assumptions about the facts of the fraud event often turn out to be wrong. By gathering evidence and supporting documentation, the claimant must show appropriate evidence that supports the allegation of fraud.

In more than half of fraud cases identified in 2008, the initial tip of potential fraud actually came from company employees. Information from customers, vendors and other parties represent the remainder. The initial warning of a potential fraudulent act is often the tip of the proverbial iceberg in terms of what actually has occurred or is still occurring. These tips are often the starting point for gathering information and documentation that will be necessary to support a claim.

Related to recovery costs, it is important to get the right parties involved in documenting and supporting the loss. Early decisions must be made concerning the custody of assets, records and communication protocols between parties. While the nature of supporting documentation for fraud events varies by the type of fraud incurred, all fraud must be corroborated and supported by evidence that meets the requirements of the insuring agreement. Providing as complete a record of all claims as possible is critical to maximizing the recovery with insurers.

As is often the case with other contingent first party claims (such as contingent business interruption, service interruption, civil authority), the custody of information often lies beyond the control of the insured. As difficult as it is to gather information from third parties in traditional claims, fidelity claims can be further complicated by the involvement of authorities conducting their own criminal investigations.

In the case of multinational investigations, insureds may have to manage multiple levels of legal authority within the country, as well as the authorities of foreign governments. This can make the process of gathering information in support of an insurance claim tedious and time consuming.