Employee Embezzlement Just Got a Whole Lot Easier Now that We’re Working Remotely

A work-from-home environment coupled with fear of the unknown has opened the door for employee theft — so long as businesses are not proactive.

There’s a hidden risk facing many businesses across the country — one that oftentimes might go unnoticed for months.

That risk? Employee embezzlement.

“The average embezzlement loss is discovered usually 14 months to 18 months after it starts,” explained Doug Karpp, senior vice president, head of executive risks & cyber, Hiscox USA.

He added that, in one of the company’s most recent studies on embezzlement, 70% of cases went on for more than a year before they were discovered.

“Because of that, we tend to have a lag in the timing of losses,” he said.

The average embezzlement scheme could cost a company hundreds of thousands of dollars. The Association of Certified Fraud Examiners reported an estimated 5% of revenue is lost to fraud and embezzlement each year — that’s about $730 billion in the U.S. alone.

Small organizations tend to see the hardest hits, with median losses for companies with less than 100 employees averaging $150,000. Larger businesses see an average of $80,000.

While many employee embezzlement schemes are conducted in the office setting, right under the noses of upper management, the COVID-19 global pandemic has given way to bigger opportunities for fraudulent activity.

That’s because remote employee behavior isn’t quite as easy to monitor as it is in an office setting: “With a work-from-home environment, there is a lack of oversight,” Karpp said. “Managers are used to having their employees at the office or on a job site and can monitor activity. They can’t do that with work from home.”

A lag in case discovery coupled with a pandemic-induced work-from-home environment could very well lead many companies toward a hard 2021 and beyond as employee embezzlement schemes start to unearth.

Why the Pandemic Might Lead to Embezzlement

There are many factors at play as to why an employee might embezzle money from their company. The COVID-19 pandemic has only exacerbated these factors.

Doug Karpp, senior vice president, head of executive risks & cyber, Hiscox USA

“The key thing to look at is motivation,” Karpp said. Typically, employees cross the line from good worker to fraudulent embezzler when they feel they are at the precipice of a personal financial crisis.

“Think of the high health care costs they fear they might be facing if they or a loved one falls sick,” Karpp explained. “The other part, and I believe it is a unique factor for this pandemic, is the fear that the employee or their spouse might lose their job.”

The latter is a significant factor. Research from the U.S. Bureau of Labor Statistics shows unemployment rates shot up from 3.8% in February of this year to 13% by May. Data from the Economic Policy Institute reports that by July, the number of unemployed U.S. citizens nearly hit 16%.

That number is higher than at any point since the Great Depression.

With the loss of a job less abstract a concept than ever before, it is no surprise as to why an employee might turn to embezzling.

And Still, Opportunity Lurks

Motivation is the deciding factor, for sure, but as mentioned before, opportunity is just as important for an employee to shoot their shot.

“Without the in-office supervision, it becomes a lot easier for an employee to cover up their fraud scheme,” Karpp explained.

Losses often involve an employee either creating false documents or falsifying existing documents to cover up that loss.

“That kind of activity becomes a lot easier when they’re in a work-from-home environment, where the employee can log-on to a personal laptop outside the company’s watch and conduct that activity.”

Whereas, in an office setting, a manager could walk around and be a potential witness to a crime in progress, now fraudulent activity can happen in the blink of an eye with management none the wiser.

Additionally, Karpp said, the current COVID environment has many in managerial positions hyper-focused on the subsequent risks stemming from the virus: “They’re distracted. And distracted business leaders may not be able to key in on this exposure, because they have to focus on and figure out how to remain operational throughout the pandemic,” he said.

What to Watch Out For

In an office, employers can watch for key behaviors to catch an embezzlement scheme before it’s too late.

“Is an employee’s lifestyle out of proportion to their salary?” Karpp gave as an example. “Did they show up to work in a new, expensive car? Before the pandemic, lavish travel could be a red flag. Any sudden change to spending habits could point to fraud.”

Further, Karpp said, in-office embezzlement could be spotted through observation of an employee’s work habits: “They’re often very smart. These are the employees who come in first thing each morning, leave late and rarely, if ever, take a vacation.”

They do this, Karpp explained, to put on a façade of dedication that ultimately covers up their fraudulent activity. Further, “the employees who come in early, stay late and don’t take vacation are actively covering up their scheme by making sure no one else touches their work. They want to be sure that when the bank statement comes in, they’re the one who first sees it.”

Unfortunately, observing an employee’s behavior in the office is not an option during the pandemic. Work from home adds challenge for employers. Visual cues like an early or late start or the addition of expensive, new things can’t as easily be spotted in remote spaces.

How to Prevent Fraud

So, in order to combat the risk of increased embezzlement during the pandemic, employers need to act now.

“The main thing employers can do is continue business as usual,” Karpp said.

Keep internal controls the same and commit to continued, rigorous oversight.

“Make sure that you find a way to continue to do the things that would have prevented losses previously,” Karpp said. “So, if you previously had more than one signature on an outgoing check, make sure that you’re still doing that. Don’t let the same individual process a transaction and then also reconcile that transaction later, no matter how tempting it might be during a work-from-home situation.

“Now more than ever, it needs to be about focusing on making sure that you still have those controls in place,” he said. &

Autumn Demberger is a freelance writer and can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

Employee Embezzlement Just Got a Whole Lot Easier Now that We’re Working Remotely