Maximizing Fidelity Loss Recoveries

Originally published in Corporate Counsel, September,

2009.

Just as a rising tide lifts all boats, receding prosperity

reveals unsuspected threats. From corporate counsel's

perspective, the risk is not just the phantoms of the deep

— massive monsters like Madoff and the subprime meltdown

— but also shallow scum like embezzling employees,

computer hackers, forgers and other ordinary cheats.

The risk of loss from crimes like these should be addressed in

every corporate insurance program through commercial crime or

"fidelity" coverage. If a loss emerges, corporate counsel

and risk managers should immediately focus on maximizing insurance

recovery. This is easier said than done, since the discovery of

betrayal by a trusted employee or business contact typically leads

to disbelief, shock, anger and shame. Paralysis is understandable,

but it only brings additional risk. Prompt analysis and action is

necessary.

Responding To A Fidelity Loss

Upon learning of a loss due to theft or fraud, corporate counsel

or risk managers should:

Immediately send notice of the loss to all potentially

responsible insurance companies, even if the full details remain to

be determined. Many insurance policies state a specific period

within which notice must be given. Failure to provide

prompt notice may forfeit coverage.

Conduct an immediate, discreet investigation focusing on the

scope of the loss, the identity of participants, and the

disposition of stolen assets.

Implement immediate safeguards to prevent further losses.

Gather information for a fraud audit and an asset seizure

action.

Attempt to interview, secure a statement, and secure

restitution from any dishonest employees.

Terminate dishonest employees.

Prepare and submit a "proof of loss" regarding the

insurance claim. Most insurance policies state a specific time

period within which a sworn proof of loss must be submitted;

policyholders should comply or obtain a written extension.

Failure to submit a timely sworn proof of loss may forfeit

coverage. The initial submission may be supplemented, if

the full nature or extent of loss is not known by the applicable

deadline.

Identify and calendar the earliest possible date when the

policyholder may have to file suit, and file a timely action if

necessary. Many fidelity insurance policies state that an action

against the insurance company must be commenced within two years of

the discovery of a covered loss. Note that extending the deadline

for a proof of loss, supplementing the proof, or ongoing

"investigation" by the insurance company will not

necessarily toll or extend the contractual suit limitation, which

typically runs from discovery of the loss. Failure to file

a timely lawsuit may forfeit coverage.

Throughout this investigation process...

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