In this article, we will look at one 'safety net' from the insurance industry that can help protect your business from major losses caused by third-party or internal employees. Yes, we are going to talk about commercial crime insurance. After going through this article, you will have a fair idea about what commercial crime insurance is, why you need one, what it covers and excludes, and many more.
Let’s start with the basics first!
What is Commercial Crime Insurance Coverage?
Commercial crime insurance is a type of insurance that provides coverage for businesses against losses caused by criminal acts such as theft, fraud, and embezzlement. This type of insurance can be purchased by companies to protect against financial losses resulting from criminal activities committed by employees, customers, vendors, or other third parties. With the increasing incidents of cybercrime and internal fraud, commercial crime insurance has become a crucial part of risk management for any business. By having this coverage in place, businesses can improve their risk management practices, protect their assets, and improve their reputation.
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Why Does Your Business Need the Cover of Commercial Crime Insurance?
Although effective internal controls, audits, and a competent external CPA can significantly prevent employee theft, even the most careful businesses have suffered hefty financial losses. According to a recent survey, businesses worldwide lost an estimated $4 trillion to fraudsters in 2017. Appropriate crime insurance can protect your company from corporate asset theft to more complex computer and online frauds.
Businesses that engage in the following activities are more vulnerable to petty theft:
- Participate in currency transactions
- Hire part-time workers
- Possess expensive office equipment
- Inventory management
Similarly, if you are involved in the following activities, you are more vulnerable to digital theft and manipulation:
- Electronic transactions
- Customer information
- Sensitive financial records
Needless to say that losses related to criminal acts can be frustrating and costly. Commercial crime insurance can provide financial protection for businesses against losses resulting from criminal activities. In the event of a loss, the insurance company will provide compensation to your business, which can help you to recover from the financial impact of the loss.
Moreover, commercial crime insurance can also help you improve the risk management practices in your company. By purchasing such coverage, you can identify potential vulnerabilities in your operations and take steps to mitigate them. This can help you reduce the likelihood of losses occurring in the first place. Having commercial crime insurance can also help you improve the image or reputation of your company. If your business experiences a loss due to criminal activities by one of your employees, it can be damaging to the reputation of the business. Having commercial crime insurance in place can demonstrate to your customers, vendors, and other stakeholders that your business takes the security and protection of its assets seriously.
What is Covered by Commercial Crime Insurance?
Typical commercial crime insurance in India covers the following-
- Employee theft coverage
This policy covers a business for losses caused by the dishonest actions of its employees. This can include theft of money, securities, or other property by theft by an identifiable employee of the Insured. It also covers loss due to forgery or alteration of cheques, bills of exchange, and promissory notes, which may be caused by an employee. Other more obvious internal types of employee theft that are covered include embezzlement, information theft, larceny, and skimming.
- Premises coverage
It covers damages caused by disappearance, destruction, wrongful abstraction or computer theft of securities or money from the premises of the policyholder by external parties.
- Transit coverage
Commercial crime insurance covers losses resulting from the disappearance, destruction, or wrongful appropriation of money or securities outside the Insured's premises by a third party.
- Depositors Forgery Coverage
It protects against losses caused by instruments like cheques drawn unlawfully on the Insured's accounts by an external party.
- Computer fraud coverage
This policy covers a business for losses caused by computer-related fraud by a third party, including hacking, viruses, and other malicious activities. This coverage can be purchased as a standalone policy or as an endorsement of a commercial crime policy.
- Kidnap and ransom coverage
This policy provides coverage for businesses that may be at risk of extortion or kidnapping, such as those involved in international trade or travel.
What Does Commercial Crime Insurance Not Cover?
You cannot claim commercial crime insurance in certain situations, mentioned as exclusions in a typical commercial crime insurance policy in India. These include-
- Losses incurred as a result of warfare, civil war, insurgency, rebellion, military action, revolution, or Governmental intervention or expropriation
- Losses incurred or exacerbated by the theft or fraud caused by the partner(s) of the insured
- Cost of replicating any information included in lost or damaged manuscripts, documents, accounts, records, and so on.
- Expenses incurred by the Insured in determining the presence or extent of any covered loss.
- Losses resulting from cybercrime, such as lost patents, trade secrets, and customer lists
- Risks covered by other insurance policies
However, certain things, such as license violation fines and identity fraud expenses can be covered by a range of enhancements and endorsements that can be added to your commercial crime insurance policy. As usual, speaking with a professional broker is the best course of action if you want to avail yourself of crime insurance that's best suited for your business. With him, you can discuss your needs and your coverage options.
Factors that May Influence the Cost of Commercial Crime Insurance
When determining the cost of commercial crime insurance, there are numerous factors to consider. Please note that no two businesses are guaranteed to pay the same amount for their coverage. There are aspects of your business that you might not expect to influence your coverage costs. However, insurers will consider them crucial while calculating your premium.
Let's Take a Look at Some of These Important Factors-
- The size of your business
It is obvious that your premium will increase when your business adds new employees. But, it is not usually an exponential increase. At times, insurers offer discounts when a business is on the rise, in order to retain them as their business expands. Insurers also check whether employees work in the same workplace or at multiple locations.
- Business Revenue
Companies with high revenue flow or sources of income are more appealing targets for perpetrators since they have more to lose. Insurance costs will be high for such businesses.
- Amount of deductible
An insurance policy's deductible is the sum of money the policyholder needs to ‘pay’ before the insurance policy will start to pay claims. Usually, this amount is adjusted with the claim amount to pay and the insurer is only liable to pay the costs that exceed the deductible amount. Lower premiums mean a bigger deductible and vice versa. Insurers often demand higher deductibles as limits increase. However, insurers will set deductibles according to what they estimate the insured can afford.
- Claims history
The claim frequency is essential to the insurer, but, the severity is even more important. If you have a lot of claims filed against you but none are paid out, you can anticipate your premium to stay consistent. Any large claim, on the other hand, will have a direct impact on your insurance premium. If your claims are both severe and frequent in terms of loss, the insurance provider may even refuse to cover you in the future.
It's also worth noting that failing to report claims to your insurer will not work. The insurance company exists to assist and protect you. As a result, informing your insurer of all existing and potential claims is the wisest course of action for all parties concerned.
- Financial controls incorporated
While determining the premium of commercial crime insurance, underwriters want to check that there are enough financial controls in place to prevent fraud. If they are not satisfied, the insurance provider may even refuse to cover you or may increase the cost to cover the increased risk.
- Possession of high-value items and office security
If you possess a high-value item such as a working prototype and it is kept in your office premises, it might significantly increase the cost of your crime insurance. Underwriters also want to see if some basic security measures, such as a few strategically placed and unobtrusive cameras, are employed by you. If they are not satisfied, the insurance provider may even refuse to cover you or may increase the cost to cover the increased risk.
