Employee Theft and Your Fidelity Bond: How to Notify, Prove and Push a Claim

Step one: find the policy and give notice

Almost every fidelity bond contains a discovery-and-notice clause: once you discover a loss that may be covered, you must notify the insurer in writing within the period the policy sets. Wording differs between insurers. Some count from the date of discovery; many also impose a second, later deadline for the formal proof of loss. On the day the first evidence surfaces, have finance pull the policy, endorsements and renewal history, and check three things: which positions or named persons are covered, whether the policy period covers the time the theft happened, and how long you have for notice and for the formal claim.

Notice does not need a final number. Send a short written notice with the company name, policy number, date of discovery, the name and role of the employee involved, and the nature of the suspected loss, such as cash shortage, false reimbursement or diverted customer payments, and state that the formal claim will follow. Use the method the policy specifies, by email and on paper, and keep proof of receipt. If you bought through a broker, copy the broker, but do not tell only the broker and skip the insurer.

The two classic mistakes are waiting to finish an internal investigation first, which runs out the clock, and treating a phone call by a manager as notice. In a dispute the insurer relies on the written record. Even if management has not decided whether to claim, send the notice anyway: notice does not commit you to a claim, but failing to give it usually ends the possibility of one.

Three things not to do before the insurer responds

Do not sign any private settlement with the employee that releases him from further liability before the insurer has taken a position. When a fidelity insurer pays, it normally steps into your shoes and pursues the employee. If you have already released the employee, you have given away the insurer's recovery right, which many policies treat as grounds to deny or reduce the claim. If the employee offers to repay part of the money, accept it, but record in writing that the payment is without prejudice to the rights of the company and its insurer, and tell the insurer so the amount is deducted from the loss.

Second, do not alter or discard books, CCTV footage or system logs. Investigators should copy, not edit. Build working papers separately and preserve original vouchers, electronic records and devices as they were found. The insurer and its adjuster will ask for originals, and any later change casts doubt on the entire claim.

Third, do not inflate the loss in outside communications. What you tell customers, partners and banks should match what you tell the insurer. Early estimates can be labelled preliminary and subject to audit, but do not fold suspected but unproven items into the claim to make it bigger. Insurers scrutinise fraud claims too, and inconsistent numbers slow everything down.

Finally, keep the insurer informed rather than surprised. If the employee resigns, disappears or starts negotiating through a lawyer, tell the insurer before you respond. A short email saying what happened and asking whether the insurer wishes to be involved costs nothing and protects you from the argument that the company acted alone in a way that harmed the insurer's position.

What the insurer will ask you to prove

A fidelity claim rests on two things: that a loss occurred and can be measured, and that it was caused by the dishonest act of a covered employee. A typical file includes the formal proof of loss with a loss schedule; an internal investigation report or a special report from an external auditor or forensic accountant; books, bank statements, reconciliations, receipts and reimbursement claims for the relevant period; the employee's contract, job description and authority limits; system access and activity logs; and the record of the complaint filed with the police or the prosecutor.

Make the loss schedule traceable line by line. Separate the methods used, such as skimmed cash, forged reimbursements, payments to fictitious suppliers or unauthorised transfers, and list for each entry the date, amount, voucher reference and how it was found. Show separately anything already recovered, anything the employee repaid, and any wages or deposits that can be set off, and deduct them. Insurers rarely accept extrapolated figures that no document supports.

Read the exclusions before you submit. Many bonds exclude interest, indirect business losses or investigation costs, and some exclude losses caused by an employee whom the company already knew to be dishonest yet left with access to funds. Anticipating these points and addressing them in the claim letter is far easier than responding after the adjuster raises them.

Keep a single evidence index that lists every document by number, date and source, and send the insurer copies keyed to that index. When the adjuster asks a follow-up question, answer by pointing to index numbers. This keeps the story consistent across several rounds of questions and makes it obvious when something is genuinely missing.

Why the insurer wants a police report

Many fidelity bonds make reporting to law enforcement a condition of payment, and even where they do not, the complaint record is the strongest evidence that the act was dishonest. Keep your statement to the police or prosecutor consistent with what you give the insurer and attach the same evidence. Pass on developments, such as the prosecutor's resolution or court steps, because adjusters often take account of how the authorities view the facts.

The criminal case and the insurance claim run in parallel. You do not have to wait for a conviction before claiming, and you should not drop the criminal complaint because insurance may pay. Once the insurer pays and pursues the employee, it may need the company to keep providing documents or testimony, so expect continued involvement.

Talk to counsel before filing so that the allegations match the evidence and you do not accuse the employee of something you cannot prove. Discipline must follow due process: a written notice of the charge, a real chance to answer, and a written decision. A defective process invites a labour complaint from the employee, and that undermines the company's credibility with the insurer as well.

It also helps to agree internally who speaks for the company. One person, usually the finance head or the legal contact, should handle the police, the prosecutor and the insurer, so that the dates, amounts and descriptions stay identical everywhere. Staff who are interviewed by the police should simply describe what they saw, without being coached. If the employee is a foreign national with a work visa, remember that the criminal case and any change in employment status can affect immigration matters, so keep the paperwork for that side in order as well.

If the claim is denied or cut

When you receive a denial or a partial payment, ask the insurer to state in writing which policy clause it relies on and which facts it found. Common grounds are late notice, the person not being covered, the loss falling outside the policy period, an exclusion, a serious lapse in internal controls, or a prior settlement with the employee. Check each ground against your policy and file and decide which can be answered with more evidence.

Supply what you can: proof of sending and receipt if notice timing is disputed; job descriptions and authority documents if coverage of the person is disputed; supplementary auditor notes on specific accounts if the amount is disputed. Send the material with a written request for reconsideration and a date by which you expect a reply. If you have a broker, ask the broker to engage on the wording, since brokers often carry weight on interpretation.

If negotiation fails, you can complain to the insurance regulator or ask it to handle the claims dispute, or pursue court action or arbitration if the policy provides for it. Ask a licensed lawyer which route fits and whether any time limit applies. Keep every exchange in writing and follow up phone calls with an email summary. For denials more generally, see business insurance claim denied.

Do not let the matter drift. Diary the dates of each submission and each promised reply, and send a polite written reminder when a date passes. A clear, dated paper trail is what a regulator, mediator or court will look at first if the dispute escalates.

Preventing a repeat, and how YIXING helps

After a theft, the insurer will almost certainly ask at renewal what has changed in your controls. Put the changes in writing: separate receiving and paying duties, require two approvers for payments, tier online banking rights, have someone other than the handler reconcile monthly, rotate roles and enforce leave, and route supplier master-data changes through independent review. These steps reduce the chance of a repeat and make renewal and any future claim much smoother.

Check that the policy matches reality. Have new cashiers, storekeepers and collectors been declared to the insurer? Does the limit still cover what one role can touch over a period? Has cover been renewed without gaps? When staff move or leave, remove system access the same day; that does more than any policy. If departing staff took client data or accounts, see mass resignation with clients taken, and for the process when an employee disputes the accusation, see employee accused of theft.

YIXING Travel Consultancy Inc. (SEC registration CS202009551, Bureau of Immigration accredited agent CA-202624381-1, with DOLE-related accreditation) supports Chinese-invested companies in the Philippines through compliance retainer services: mapping notice and claim deadlines, assembling vouchers and loss schedules to the adjuster's requests, coordinating auditors and licensed counsel, following up written exchanges with the insurer and broker, and helping put internal controls around cash-handling roles. We are not a government office, we do not replace lawyers, accountants or doctors, and we make no promise about any finding, payout or ruling. For your specific case consult a licensed attorney; this article is not legal advice.