Recovering Employee Dishonesty Claims David P. Bender, Jr., Haynes and Boone, LLP Christopher Giovino, Aon

Crime Pays: Recovering Employee Dishonesty Claims CFE’s estimate that occupational fraud amounts to 5% of gross revenues Median Loss caused by occupational fraud was $140,000 20% involved losses of at least $1 million Typical fraud lasted two years

Crime Pays: Recovering Employee Dishonesty Claims: Context Of the reported domestic cases 40% committed by employees ($60k) 37% committed by managers ($180k) 17% committed by owners/executives ($485K) 65% MEN; 35% WOMEN Size of loss correlates with annual income level, tenure, age, education, level of collusion 87% were first-time offenders 36% judged as “living beyond their means” 27% experiencing financial difficulties

Crime Pays: Recovering Employee Dishonesty Claims: How Fraud Occurs Incentive or pressure to perpetrate a fraud Business (making the “number”) Personal (usually financially motivated) Opportunity to carry out a fraud Access to assets Inadequate or nonexistent controls Authority to dissuade detection Attitude and ability to rationalize fraudulent action Management culture Financial aggressiveness

Crime Pays: Recovering Employee Dishonesty Claims: First Step When Fraud Suspected The Policyholder’s Team In-house and outside counsel Security and internal audit teams Investigative specialist and forensic accountant Broker claims advocate Business representatives The Insurer’s Team In-house adjuster (usually an attorney) External counsel (acts as adjuster and potentially litigation counsel) Forensic accountant (usually represents only insurers)

Crime Pays: Recovering Employee Dishonesty Claims: The Investigation The Internal Investigation What are the objectives? Factual determination of events Preliminary quantification of damages Determination of coverage and probable recovery Who conducts? In-house counsel and internal audit staff External counsel and investigative specialists including forensic accountant

Crime Pays: Recovering Employee Dishonesty Claims: Typical Mistakes Lawyers with no insurance coverage experience Reliance on Law Enforcement Missing Deadlines Reliance on Insurer Team for Proof of Loss

Crime Pays: Recovering Employee Dishonesty Claims: Evidence Needed Damages Quantification and Proof Calculate – do not estimate Insurers have no incentive to pay “estimates” Fine creative ways to quantify damages Use historical trends Identify statistical anomalies Prepare to defend any assumptions

Just What is a Proper Proof of Loss??? The carriers ALL expect the insured to provide them with a FULL report BAD – What will most always get you in trouble is executing their “form” and sending batches of documents and data BEST – What they really want: Their executed and notarized “form” supported by a solid comprehensive narrative; accurate quantification with schedules and workbooks ... and a repository of all supporting documents that they can search

Crime Pays: Recovering Employee Dishonesty Claims: Other Tools Civil Litigation

Crime Pays: Recovering Employee Dishonesty Claims: What To Expect Expect Pushback Typical Conditions Defenses Failure to give prompt notice of loss Prejudice subrogation rights Failure to disclosure prior acts of fraud or dishonesty Involvement of officers in the fraudulent scheme Failure to prove “manifest intent” Typical Damages Defenses Loss not fully documented or proven Claim includes indirect, consequential, or excluded losses (e.g., potential income) Loss does not reflect credits for recovery

CONTACT LIST David P. Bender, Jr. Haynes and Boone, LLP 214-651-5223 david.bender@haynesboone.com Christopher J. Giovino Director, Aon Global Risk Consulting Aon Risk Solutions 203-423-8212 chris.giovino@aon.com