A Fidelity Guarantee policy is a contract of insurance and also a contract of guarantee to which the general principles of insurance apply. It does not guarantee the employee’s honesty but it guarantees that if the employer suffers any direct financial loss arising out of the employee’s dishonesty, the insurers shall indemnify the said loss to the employer. The Fidelity Guarantee policy indemnifies employers against pecuniary losses on account of forgery, defalcation (misappropriation of money), embezzlement (diversion of money to one’s use) and fraudulent conversion by employees. The object is to provide protection against losses arising out of the default of an individual acting in some capacity such as Cashier, Accountant, Store-keeper, etc.
The employer is covered for any act of forgery or fraud or dishonesty committed by the employee on or after the date of commencement of the policy and during the employee`s uninterrupted service with the employer. The loss should be detected during the period of insurance or within 12 calendar months of the expiry of the policy. In the case of death, dismissal or retirement of the employee, the loss should be detected within 12 calendar months of such death or dismissal or retirement whichever is earlier.
The main factors considered for issuance of Fidelity Guarantee policy would be the extent of control over the work of the person to be guaranteed in the form of master and servant relationship. The record, standing and reputation of the employee is also important and the “bonafides” of the employer and their system of checking of the accounts and general supervision of the employee are factors to be considered.
It should be noted that the cover granted is against a direct pecuniary loss and not a consequential one and the loss should be in respect of moneys or goods of the insured. The act should be committed in the course of the duties specified and if the employee guaranteed under the policy had left the service of the employer and was re-engaged by him, no liability attaches to the policy, unless the consent of the insurers was obtained. No loss that may have been caused by bad accountancy is payable: the loss must be supported by evidence of any of the specified acts of dishonesty.
In the case of a loss, the Insured should take immediate steps against the defaulting employee for the recovery of cash/goods as the case may be and also other disciplinary action required, depending on the case. The Insured must establish the “act of infidelity” committed by the particular employee covered under the Policy. In many cases, the loss noticed at the time of stock taking in case of stock is not covered. The Insurer shall not be liable, if at the time of any loss, any other Security Guarantee or insurance existing covering the same loss and the policyholder must submit a “proof of loss” to the insurance company detailing the amount of its claim.
The requirements to establish the “act of infidelity” and to submit a “proof of loss” means a forensic audit is essential. Ordinarily the cover is extended to Forensic Auditors fees incurred in establishing and substantiating the amount of loss. Clients’ in-house expenses and overheads are not covered.
Most white collar crimes are complex, and unlike other forms of insurance, the burden of proof is squarely upon the policyholder, who also bears the burden of investigation, audit and accounting, as well as submission of conclusive documentation and evidence to the insurer in the form of a formal Proof of Loss.
The following services/skills are therefore imperative for a successful Fidelity Guarantee Insurance Claim:
- Proof of Loss
- Law Enforcement Liaison
- Forensic Accounting
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