Author – David C. King, President & CEO, Horst Insurance 
Posted – October 15, 2015
There is no argument that a well managed criminal background check can and is an important element in your pre-hire process. In fact, many employers today no longer have the option of conducting a criminal background check on new employees, especially if your employees are responsible for children or will be working, for example, on a construction site at an elementary school. In addition, most in the risk management world are strong believers that the past is a decent snapshot of the future. In other words, past patterns will likely repeat themselves in the future.
Did you know, however, that information obtained in a criminal background check can lead to loss of “Employee Theft” or “Employee Dishonesty” coverage for that employee? A provision in most standard Commercial Crime policies reads as follows:
D. Exclusions 1. This insurance does not cover b. Acts Committed By Your Employees Learned Of By You Prior To The Policy Period – Loss caused by an “employee” if the “employee” had also committed “theft” or any other dishonest act prior to the effective date of coverage of this insurance and you or any of your partners, “members”, officers, directors or trustees, not in collusion with the “employee”, learned of such “theft” or dishonest act prior to the Policy Period show in the Declarations”.
In addition, many Employee Dishonesty policies also carry a Condition that reads:
D. Additional Exclusions, Conditions and Definitions – Additional Exclusions 1. We will not pay for loss as specified below a. Employee Cancelled Under Prior Insurance – loss caused by any “employee” of yours, or predecessor in interest of yours, for whom similar prior insurance has been cancelled and not reinstated since the last such cancellation”.
And, to make it a perfect three strikes, the standard Employee Dishonesty coverage form also includes a Condition that reads:
D. Additional Exclusions, Conditions and Definitions – Additional Exclusions 2. This insurance is cancelled as to any “employee”: (1) Immediately upon discovery by: (a) You; or (b) any of your partners, officers or directors not in collusion with the “employee”; of any dishonesty act committed by that “employee” before or after becoming employed by you”.
In other words, if you know of a potential employee’s prior dishonest act, or if that potential employee had coverage cancelled (and not reinstated) under a former employer, coverage under your Commercial Crime / Employee Dishonesty program will exclude coverage for this employee upon hiring. And, once you discover that an existing employee has committed a dishonest act, coverage ceases immediately.
Despite all the Federal and State hiring programs aimed at encouraging employers to hire those who have, through one form or another, rehabilitated their past digressions, the insurance world has not yet adopted this initiative and continues to exclude coverage for those whom have conducted past “dishonest” acts. Most are in agreement that the term “dishonest” refers to acts which would be covered under the policy – acts like theft and embezzlement.
As mentioned earlier, many employers don’t have a choice when it comes to conducting criminal background checks pre-hire. Besides compliance-related checks, it is also an acceptable risk management practice to conduct a background check whenever hiring for a position that involves access to company property or assets. It is important, however, to understand the downstream impact to your Crime coverage when making a decision to hire someone with a record of prior “dishonest acts”. Establishing a standard process for evaluation of each circumstance is important. It may not lead to a restoration of coverage, but make an informed decision based on key criteria:
- Type of past dishonest act
- Time lapsed since past dishonest act
- Scale and scope of past dishonest act
- Position exposure to company assets
There are also more quantitative measures that can be taken. Some Crime coverage underwriters will agree to specifically endorse the individual onto the policy to receive coverage. You must be prepared, however, with the above facts in order to facilitate such consideration from the insurance company. In addition, employers seeking to hire an individual with a past criminal background that precludes them from coverage can turn to the Federal Government for help. In 1966, the US Department of Labor created the Federal Bonding Program (FPB). Federal financing of Fidelity Bond insurance, issued free-of-charge to employers, helps to enable the delivery of fidelity bonds to assist ex-offenders and other at-risk job applicants. You can find out more information about the Federal program at www.bonds4jobs.com .
Crime/Employee Dishonesty coverage is an important element in your overall insurance program. So too is the need to have a detailed pre-hire process that includes a criminal background check. Understanding the impact of knowledge once gained, especially when it involves a past “dishonest” act, will help you to better manage an exception process, as well as take steps to preventing coverage gaps.