Professional indemnity insurance, also called errors and omissions (E&O) insurance, gives indemnity to the professionals against allegations of negligence or errors in their professional services. Professional indemnity policies frequently contain certain provisions for employee fraud and dishonesty. The following is an in-depth analysis of how employee fraud and dishonesty coverage aspects are addressed within a professional indemnity policy in India.
Employee fraud and dishonesty coverage aspects
Fraudulent acts by employees: Professional indemnity policies can include
The extension to cover fraudulent or dishonest acts by employees is of importance
to the business as it cushions it against financial losses resulting from such acts,
which may include among others embezzlement, theft or fraudulent financial reporting.
Indeed, some contractual covenants insist on this extension for employee dishonesty .
The partners in the case of firms and directors in the case of company are normally
excluded in the definition of employees.
Third-party claims: If any third party sustains monetary loss from some act of fraud or dishonesty carried out by an employee, then the liability arising from such claims may be covered under the policy. The related legal costs of defense and settlements or judgments against the insured also may be covered.
Internal controls and conditions: The insurers generally require the insured to install certain specified internal controls to prevent and detect fraud. For instance, regular
audits, separation of duties and stringent checks and balances within the
organization.
Exclusions and limitations of employee fraud and dishonesty coverage
Knowledge of fraud:If the management or key personnel were aware of the
fraudulent activities and failed to take action, the policy might exclude coverage for
those acts. This brings out the relevance of a proactive approach in relation to fraud
detection and prevention.
Prior acts: The policies may exclude coverage for fraudulent acts that took place before
of the policy. This is very important for a business to know the retroactive
date of their policy.
Intentional acts: Although the policy applies to employee dishonesty, acts of fraud committed by higher-level management – such as business owners or directors – are usually outside the scope of the policy. Policies delineate employee fraud from acts of fraud that are intentional on the part of the management or business owners.
Claims Process
Notification: Upon discovery of any act of employee fraud or dishonesty, the policyholder should provide notification to the insurance carrier as soon as possible. Notification is essential and must be given timely so as to ensure that the claim will be covered.
Investigation: An insurer generally investigates the claim so as to establish its
validity. This may be achieved by examining the existing controls of the company,
interviewing the employees, as well as checking the financial documents.
Settlement: After investigating a case, an insurance company settles the claim
according to the quantum of the coverage it offers. This may be by way of
compensation for direct loss, payment of third-party claims, among others.
Best practices to avoid employee dishonesty and fraud
Extensive risk management: A good risk management structure-end
The management practices can prevent employee fraud. The management includes
regular training and policies that bring clarity to the workers. It also enables ethical work
culture.
Policies Review: Reviewing and updating insurance policies regularly makes them
relevant. They will cover and remain relevant to the growing and developing business.
Professional indemnity policies are very important in safeguarding businesses against
monetary losses due to fraud and dishonesty by employees. An understanding of the
inclusions, exclusions, and best practices will ensure that a company is adequately
protected. Compliance with regulatory requirements is mandatory.
In this respect, a scope and limitation understanding on the employee fraud and dishonesty coverage of professional indemnity policies will benefit professionals in terms of risk management and the safeguarding of reputation and financial stability.
It is best to consult an insurance broker to seek clarification on the implications of the
defamation clause in Professional Indemnity insurance policy.
We at Zen Insurance Brokers assist in choosing an insurance policy with clauses
suited to your requirements. Choose your insurance policy wisely. Get in touch with
us for any assistance.
Disclaimer:
Zen Insurance Brokers is an IRDA registered broker which facilitates quick and
adequate insurance broking services. We deal with only regulator approved products
of insurers. We do not underwrite the products.
-Hema Gopalakrishnan
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