Ghost busters: A look at direct financial loss

By: Gina Tognocchi Stokes, Claims Handler at Camargue

Theft of monies by employees is a common hazard of the business environment today and as the ever varying and inventive methods of appropriating funds from an employer increase, so does the need to insure a business against these risks.

With many products available to cover this type of risk, one of the focuses of these losses is that of the insurer’s reliance on the issue of what constitutes a direct financial loss. Direct financial loss is definable as a loss of the Insured’s own money or
property.

Take the following example, “Labour R Us” is a labour broker and they outsource employees to “We Need People” and charge them a global amount based on the number of people that are stationed there, plus their fee.

Mr. X is placed at We Need People in a management position and over a period of time orchestrates the theft of approximately R500 000 using various means.

The primary method of misappropriation of the funds is that Mr X creates fictitious employees whose salaries are then invoiced to We Need People by Labour are Us as placement staff. Labour R Us then pays the staff directly. When the loss is discovered We Need People looks to Labour R Us to reimburse them for the loss. Labour R Us has a commercial crime policy which covers both themselves and their subsidiaries, and looks to their Insurer to recover the loss.

On the face of it one would believe this claim to be covered as it appears to be a loss to Labour R U s, however when we look closely, it is in fact that of We Need People.

Labour R Us outsourced its own employees to We Need People and then Labour R Us would in turn remunerate the individuals directly for the work done. Effectively, Mr. X overcharged We Need People for “ghost” employees that did not work there.
Labour R Us charged We Need People for a service and was paid for that service by We Need People. The fact that We Need People was fraudulently overcharged by an individual employed by Labour R Us, without the knowledge of Labour R Us, does not result in a loss to the insured. There is therefore no direct financial Loss.
It is important to note these instances and to effectively understand the implications of these clauses on a loss. The insured will then be aware of the level of protection that their cover actually provides, as well as the strict circumstances in which it can be applied.