Risk & Business Magazine Capri Insurance Spring 2016 | Page 8

Employee Dishonesty
The Liability of Leadership in the Non-Profit Sector

BY: PAULA GARRECHT, CAIB, CIP, COMMERCIAL ACCOUNT EXECUTIVE, CAPRI INSURANCE

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on-profits, whether they appear to be from the outset or
not, are big business. Big business in terms of the amount
of money that changes hands and big business in terms of the
exposures and risks faced by individuals within the organization.
The difference between these entities and others can be viewed
in terms of how their profits (or lack thereof) are structured and
how the business is overseen. With the lax financial controls
and the high level of trust in many non-profits, it can become
very tempting for individuals within these companies to commit
fraud or other acts of employee dishonesty. Protecting the
assets of the non-profit should be a top priority for those in the
organization.
Employee dishonesty is a problem, which is faced by nearly every
organization, from large multinational corporations to the small
mom and pop shops in any town. Non-profits are no different
and are not immune to the potential for employee dishonesty.
As an example of how significant this type of exposure can be,
consider the case of Ephonia Green, an administrative assistant
for the Association of American Medical Colleges. Between 2005
and 2013, Green was able to falsify documents and embezzle
more than $5.1 million dollars. That is more than enough money
to put most non-profits out of business completely. Employee
dishonesty insurance exists primarily to cover the potential loss
of money or other property resulting from acts of dishonesty or
fraud by employees of the organization.
Directors and Officers Liability provides insurance coverage
for liability arising out of wrongful acts. It provides coverage
for defense costs and resulting settlements that the directors,
officers and the legal entity are held responsible for. Often,
board members of nonprofits serve on a volunteer basis and
the thought of liability never crosses their mind. It is, however,
a very real exposure. Should an officer, especially one in a
position of financial authority, commit a wrongful act the entire
organization is at risk. If the risks faced by an organization in
terms of employee dishonesty are serious, imagine the risks
faced by that organization should an officer or director fail to
meet the standard of care expected of them in the performance
of their duties.
One of the main issues that exist when it comes to these types
of exposures are that the board often are not directly involved
with the purchase of insurance (and often don’t know much
about it) and the people who are involved are often the same
ones who are the most likely to embezzle from the organization.
It is imperative to ensure that your coverage is adequate for
the amount of money that your organization handles. $5000
to $10,000 of Employee Dishonesty coverage is not going to be
of much help for an organization dealing in with hundreds of
thousands of dollars. $1 million Directors & Officers Liability
coverage is not enough protection if you have a multi-million
dollar budget.
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There are some steps you can take to reduce your exposure to fraud
losses. Make sure countersignatures are required on all checks, have
the accounts reconciled by a third party, allow no pre-signing of
checks, run standard background checks on prospective employees,
and run external audits. Finally: ensure that you are covered for
Employee Dishonesty and Directors and Officers Liability insurance.
The limits and coverage required will vary between organizations, and
each entity should give considerable thought as to their own needs.
Most of all, make sure your board of directors understands what the
insurance is for And that it adequately protects their exposures. If
you would like a thorough review of your society’s current insurance
policy, especially in regard to Employee Dishonesty and Directors and
Officers Liability coverage, please contact us for an evaluation. We
can be reached at 1.800.670.1877.
This year marks Paula’s 25 year anniversary with Capri Insurance.
She spent her first 15 years as claims team leader and client advocate,
transitioning to Commercial Account Executive in 2006. Her practice
focuses on the Construction, Public Entity and Not for Profit sectors, and
she has presented on a variety of insurance and risk management topics
for those sectors in recent years.