Fidelity Claims Investigations

A Comprehensive Guide to Successful Claims Outcomes (Part I of II)

Fidelity/crime/financial institution bonds, in a general sense, cover an insured from the willful theft of property, money, and securities by one of their employees or an outside third-party carried out through a variety of means. Such fraud can impact myriad industries. In this two-part article, the authors provide fundamental aspects of a fidelity investigation, from inception to recovery of stolen funds.

Introduction: Understanding Fidelity Investigations

Fidelity/crime/financial institution bonds, in a general sense, cover an insured from the willful theft of property, money, and securities by one of their employees or an outside third-party carried out through a variety of means. Such fraud can impact myriad industries. However, typical industries affected by employee fraud, along with examples, include but are not limited to:

• Retail: overpriced store leases, stolen inventory, no-bid advertising contracts
• Healthcare: procurement fraud of healthcare equipment
• Hospitality: theft of inventory
• Finance: custodial funds stolen by a broker
• Credit Union: employee faithful performance failure or loan program losses
• Technology: embezzlement of funds from a tech company
• Education: theft of high-end copier equipment from a state university system
• Non-Profits: stolen tuition, grants, and payment of personal bills
• Government: insider dealing with large contracts, pay raises, and vendor payments
• Manufacturing: a theft ring stealing OEM parts and selling out the back door

This article will provide fundamental aspects of a fidelity investigation, from inception to recovery of stolen funds. This information is primarily intended to assist:

• Claims examiners
• Inside and outside counsel
• Risk managers
• Brokers
• Claim executives who oversee fidelity claims
• Corporate investigation groups faced with employee theft losses

Preliminary Steps in a Fidelity Claim Investigation

When a fidelity claim is being filed, there are several initial steps normally taken by counsel and/or carrier. For each claim, it is necessary for counsel and/or carrier to first carefully review the terms and conditions of the fidelity policy to understand specific coverages, limits, exclusions, and general policy conditions. Policies vary across organizations, so it is important to understand each organization’s needs and for brokers and risk managers to ensure that the appropriate coverage is in place before the need arises.

As the financial investigators assisting a party at interest to a fidelity claim matter, they defer all coverage interpretation and decisions to counsel and/or carrier. However, the investigators must be familiar with all aspects of the fidelity policy before commencing any probe.

Some other determinations counsel and carrier make include determining the date of discovery and any subsequent claimed losses, determining whether or not the loss agent has ownership interest in the insured entity. They also verify dates of employment of the loss agent and whether that individual had any prior theft issues known to the insured. They also determine whether the insured has had continual coverage and if so for how long and at what coverage limits per section. They also review additional coverage like claim preparation expenses as well as responsibilities of insured and insurer. The counsel and/or carrier also must be cognizant of any potential subrogation recovery possibilities.

Types of Fidelity Insurance Claims or Losses

Fidelity insurance protects organizations from financial losses resulting from acts of dishonesty or fraud committed by their employees or third parties. Most fidelity insurance policies provide coverage for the following types of claims:

• Internal fraud: Employee dishonesty or theft. This is the most common type of fidelity claim as it covers losses resulting from internal fraud, such as theft, embezzlement, computer fraud, forgery, and funds transfer fraud schemes, committed internally by an organization’s employee. Some of the fraud schemes often perpetrated include payroll, vendor or accounts payable procurement fraud, cash and sales/accounts receivable schemes, and theft of physical assets like inventory, equipment, and machine parts.
• Forgery or alteration: These claims cover losses resulting from the forgery or alteration of financial documents, such as checks, promissory notes, purchase orders, and contracts such as signing the controller’s name to falsely prepared accounts payable checks.
• Computer fraud: This type of claim covers losses resulting from computer-related fraud, including social engineering (phishing attacks), hacking, or unauthorized access to the organization’s computer systems. Computer fraud claims under fidelity insurance policies have grown over the years as more companies find themselves victims of cyber breaches.
• Funds transfer fraud: These claims cover losses resulting from fraudulent instructions to transfer funds. These may emanate from inside or outside of the company.
• Money and securities: Fidelity insurance policies may provide coverage to the policyholder in the event of theft, disappearance, or destruction of money, securities, or other negotiable instruments. An example would be the theft of cash receipts.
• Credit card fraud: Some fidelity policies may include coverage for losses resulting from credit card fraud. Coverage may apply for fraudulent credit card transactions and be advantageous to organizations that process credit card payments. Using company credit cards for unauthorized personal purchases is a common scheme.
• Third-party theft: Fidelity insurance policies can also include coverage for losses resulting from theft or fraud committed by third parties. Some of these third parties may include contractors, vendors, or other individuals that have access to the company’s property or assets including orchestrating a kickback scheme with an insured employee.

Parties and Experts Involved in a Fidelity Claims Investigation

Fidelity claims typically include several parties, the most obvious being the insured or policyholder and the insuring party or insurance carrier. However, due to the nature of the fidelity claim, other parties are involved in the claim process and each party has a distinct role they play in the process:

• Insured/policyholder: The policyholder is the individual or business that is identified in the fidelity insurance policy as the covered party. Once fraudulent activities or dishonest actions have been detected and identified, the policyholder submits a claim for the covered loss to their fidelity insurance carrier in the form of a notarized Proof of Loss. This Proof of Loss should include a narrative description of the loss particulars (schemes), specific coverages that the insured feels respond to the claim, date of discovery, theft agents, period covered by the loss, support for all aspects of the loss, and the total amount of the claim. Depending on the size of the policyholder organization, they may have an internal audit or risk control department involved in uncovering and documenting any employee fraud.
• Insurance carrier/insurer: The insurance company’s claims handling team is responsible for ultimately assessing and processing claims made by the policyholder. Once a claim is filed, the insurer determines whether the claim is covered, what portion of the claim has been properly supported and quantified, and how much the insured is owed in satisfaction of their claim. As part of the claim review process, the insurer may involve the policy holder, underwriter, inside counsel, outside counsel, internal or external forensic accountants, information technology (IT) experts, and others that can bring clarity to any major claims issue.
• Insurance broker: The insurance broker is typically the individual that acts as the intermediary between the insurance company and the insured. Through their service, the insurance broker understands the background and needs of the insured to assist them in selecting an insurance policy that best fits their situation and actively works to obtain the best coverages at the most affordable rate for each policyholder.
• Alleged dishonest employee or third party: Depending on the circumstances of the claim, there is either an alleged employee(s) or third party that perpetrated dishonest or fraudulent acts that resulted in financial losses. These theft agents may engage their own counsel in defense of the allegations made against them.
• Law enforcement: When submitting an employee dishonesty claim, many fidelity policies require the policyholder to file a criminal complaint against the alleged dishonest employee and cooperate with law enforcement. In these situations, law enforcement often become involved in the investigation and gathering of evidence for potential criminal charges. It is not unusual for a theft claim to run parallel on two fronts: a civil and a criminal investigation. It is important for the financial investigation team to develop a rapport with the criminal investigators and to aid one another as much as is legally allowed, to gain as full an understanding of the schemes and actions perpetrated by the theft agent.
• Claims adjusters: On behalf of the insurance company, the claims adjusters investigate and evaluate the fidelity insurance claims. It is quite common for fidelity claim examiners to come from a legal background, many with legal designations. They review the policy, gather and analyze the evidence, determine the extent of the covered loss, and often recommend retaining additional experts and professionals to assist in the claims review process. These professionals can include attorneys, forensic accountants, IT, equipment, and other claim-specific experts.
• Legal counsel: In complex fidelity claims, various parties may hire legal counsel to represent their interests. Often, the insurance company, policyholder, and possibly the alleged dishonest employee or third party will retain legal counsel who provides guidance throughout the claims process and may assist in negotiations or resulting litigation.
• Forensic accountant: Insurance companies usually have their own internal claims accounting groups who routinely assist various claims adjusters in understanding the financial aspects of different claims. Fidelity claims frequently involve financial malfeasance and, depending upon the circumstances, claims adjusters and insurers may choose to hire independent forensic accountants to help gather and analyze the evidence, evaluate the validity of different aspects of the claim, and quantify the extent of supported losses for the carrier. This then allows the carrier to apply coverage and determine the amount of covered loss per the insured’s fidelity policy.
• Other experts:
  • Digital forensics: Digital forensics professionals are required to gather information in a secure manner from e-mail systems, mobile devices, databases, file shares, general ledger systems, etc. The data gathered may be used in legal proceedings, especially if referrals to law enforcement are contemplated. As a result, it is important to document collection records, chain of custody, and perform electronically stored information (ESI) data capture in accordance with industry standard forensic preservation practices. In addition to the data preservation efforts, additional technical experts may be necessary to assist with document review capabilities, database analytics, and reporting of the information relevant to the investigation.
  • Global investigations: Successful subrogation recovery may depend upon the global scope and outreach available from your claims recovery team. Identification of potential recoverable assets in foreign countries requires local expertise as to the laws and regulations governing the recovery of ill-gotten funds.
  • eDiscovery: eDiscovery professionals are required to process, search, and facilitate the review of unstructured data (such as electronic communications like e-mail and text messages). These tools allow for the application of advanced search techniques that provide investigators with the ability to deploy artificial intelligence to identify potentially relevant documents discussing the fraud. This is especially effective in situations where the alleged dishonest employee(s) used codewords when discussing the fraudulent
  • Data analytics: Investigative data analytics professionals review and analyze financial systems that may have transaction level details associated with the alleged fraud. By reviewing and reporting on the transactions that are subject to the investigation, the data analytics professionals can help to quantify the scope of the potential loss. Additionally, by applying ongoing risk assessment techniques to the financial systems, new automated compliance procedures can add to standard review processes to potentially limit future exposure to these issues.
  • Asset search and recovery group: A key component to your subrogation recovery efforts is a thorough asset search to include the names and locations of all known (and yet unknown) associates of the theft agent. An experienced asset search team can aid the insurer in identifying potential assets for seizure/forfeiture and direct law enforcement toward capital that can potentially be frozen while the investigation is ongoing. These professionals utilize public information sources such as news articles, social media posts, and other public disclosures to target investigation efforts. Relatives, bank accounts, assets owned, travel frequencies, phone records, identification numbers, former employers, investment accounts, tax returns, insurance policies, bank activity, disbursement history, and the like allow the recovery group to build a financial history that can lead to a maximization of any available recovery.

Conclusion

Every fidelity claim is unique and different, but they all need a qualified, experienced group of professionals to address the various aspects of each claim. Finding experts who work hand-in-hand with one another to address the unique challenges of each specific claim is critical to achieving the best outcome.

This article was previously published in J.S. Held Insights (2024) and is republished here by permission.

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Peter Fogarty is an Executive Vice President in J.S. Held’s Forensic Accounting/Insurance practice. He has more than 35 years of expertise in forensic accounting and fraud examination. As a Certified Public Accountant and Certified Fraud Examiner, who is also certified in financial forensics, he specializes in the financial evaluation of damage claims and frauds, including first-party property losses, third-party liability cases, commercial litigation damages, and fidelity matters. Mr. Fogarty has significant experience assessing damages for both domestic and international organizations, including many Fortune 500 companies. In addition, he has managed several nationwide catastrophe response programs and has been responsible for the forensic accounting analysis of claimed damages exceeding $400 million. He has litigation experience in various courts throughout New England and has testified in both state and federal courts in cases involving such matters as commercial loss of income, contract disputes, fraud, personal injury, and subrogation.

Mr. Fogarty can be contacted at (401) 741-9944 or by e-mail to pfogarty@jsheld.com.

Natalie Lewis is a Senior Vice President in J.S. Held’s Economic Damages and Valuations practice. As a Certified Public Accountant and Certified Fraud Examiner, who is also certified in financial forensics, she specializes in forensic accounting and the analysis of economic damages. Ms. Lewis provides consulting and expert services for both plaintiff and defense law firms throughout the country. She has conducted fraud investigations for companies of all sizes as well as government entities. Her investigations have spanned the globe and include various internal investigations, embezzlement, Ponzi schemes, commercial crime insurance claims, Foreign Corrupt Practices Act (FCPA), and asset misappropriation.

Ms. Lewis can be contacted at (470) 852-4601 or by e-mail to natalie.lewis@jsheld.com.

Stephen O’Malley is a Senior Managing Director and leads Digital Investigations and Discovery services within J.S. Held’s Global Investigations practice. He has been engaged on some of the largest multinational investigations and has given expert testimony in the areas of analysis and restoration of electronic data, electronic discovery best practices, and testing of related computer software. Mr. O’Malley is an expert eDiscovery practitioner and data analyst. He has significant experience in major fraud and corruption investigations including FCPA, Ponzi schemes, U.S. Department of Justice and SEC investigations; in multijurisdictional litigations; in provision of evidence for litigation support; and in advanced data analysis.

Mr. O’Malley can be contacted at (718) 510-5617 or by e-mail to somalley@jsheld.com.