Five Ways to Combat Employee Theft in the Construction Industry
Many construction companies don’t realize how susceptible they are to financial loss caused by the fraudulent acts of their employees. Employee theft involves more than just cash. In industries like construction there are other ways employees can steal or misuse an employer’s assets.
Most recent estimates from the Association of Certified Fraud Examiners indicate that a typical organization loses at least five percent of its revenue each year to employee theft.
Employee theft insurance, also known as crime coverage, protects employers from financial loss due to the fraudulent activities of an employee or group of employees. The policy provides coverage for employee theft of: money, securities, forgery, alteration, unauthorized electronic funds transfers, credit card fraud, computer fraud, money order fraud and counterfeit fraud, among others. It is an important coverage, as both standard commercial general liability (CGL) and property policies exclude employee theft losses. In some cases property policies can provide a sublimit to the insured, but it is often inadequate.
Most importantly, construction companies can also add endorsements for additional coverage, such as third party coverage. This can be added to protect clients from damage or loss to property, money or securities leased or owned by the client from theft by employees. It includes coverage for theft or crimes taking place at the client’s premises as well as the company’s place of business. This is a valuable coverage to consider if a significant portion of revenue comes from just a handful of large clients.
Furthermore, all businesses are susceptible to employee theft even with background checks and other means of ensuring a quality workforce. Most employees that steal are first-time offenders with a clean employment history. To help put this in perspective, the following are actual claim scenarios from a large insurance company that were directly associated with construction companies.
An insured’s employee and an outside accomplice stole cable from inventory, which was subsequently discovered at a local salvage yard. The employee confessed to police saying he had been taking the wire from the insured and trying to sell it as scrap to the salvage yard. The insurance carrier paid approximately $73,000 to the insured.
The CFO and director of a construction company and two hospital employees made arrangements to hire a contractor if he would overbill the hospital and kick back the difference to them. The loss was well over $1 million.
Over a period of several years, a project manager for an apartment management company approved duplicate payments to a construction contracting firm. The firm’s owner had formerly been an employee of the apartment management company and had become friends with the project manager. They were also co-owners of other rental properties. The insurance carrier paid approximately $540,000 to resolve the claim.
To avoid one of these scenarios happening, the following elements are crucial to spot and reduce employee theft:
- Training and Procedures. This encompasses not only what is required for employees, but also supervisors and any partners. All parties should be trained on employee theft policies and procedures, as well as the investigation and disciplinary process. Additionally, a company should have fair employment practices, separation of duties, access and authorization controls, written job descriptions and a clear organizational structure.
- Engagement. A positive, engaged work environment is crucial. Engaged employees have a direct correlation to efficiency and profitability. At the heart of it all though is trust. From employees to supervisors, supervisors to employees, employees to employees and so on, trust needs to be established and felt across the organization.
- Communication. Ongoing communication between the insurance broker and the insured is critical. But that’s not all. Open lines of communication are also needed between leadership and employees. Employees need to feel comfortable and protected when reporting the possibility of theft.
- Audits. Perform both regular and irregular unannounced financial audits and fraud assessments. This will help measure the effectiveness of existing controls and let employees know that theft prevention is a high priority.
- Vigilance. This final element speaks for itself. Always look for an explanation when something doesn’t make sense. If something doesn’t feel right, it probably isn’t.
Because of the dollars involved, a significant amount of time and resources are spent in an effort to both reduce and combat employee theft. An internet search will reveal countless more checklists and warning signs. Talk to an insurance broker to be sure there are proper coverages and prevention mechanisms in place to minimize risk in the construction business.