Rising corporate crime highlights liability risk for SA businesses

Anton Meyer, Executive Head at SHA Specialist Underwriters.

The need for businesses to arrange appropriate insurance to cover employee dishonesty has been highlighted by the recent statistics released by Norton’s Inc., which found that the low conviction rate in the country is one of the reasons white collar crime has increased by about 50% in the past 10 years.

This is according to Anton Meyer, Executive Head at SHA Specialist Underwriters, who says that employee fraud has become a national epidemic. “As a result, businesses must take heed and ensure that they have the necessary risk transfer programs in place to adequately protect themselves from financial losses.”

He explains that previously a standard Fidelity Guarantee (FG) policy would have protected a company against losses suffered as a result of staff stealing from the company. “Now given the material changes to the liability landscape of directors following the implementation of the new Companies Act, coupled with the material increase in both frequency and severity of staff fraud losses, a simple FG policy may no longer suffice.”

Meyer explains that internal fraud perpetrated by employees poses a big risk for businesses, not only due to the direct financial losses suffered by the business but also, due to the organisation’s vicarious liability to their own clients, as well as huge reputational risks following the dishonest actions of its employees. “If it can be shown that the company’s risk mitigation controls failed or were simply not in place, it can not only cause direct financial losses for the organisation, but the company and its directors can be held liable for losses incurred by third parties.”

We have seen cases where a company goes into liquidation because a staff member has stolen money, rendering the organisation unable to pay creditors, shareholders, employees and suppliers, he says. “An allegation of a fiduciary breach could then be made against a director or officer by a stakeholder, on the basis that the directors wrongfully failed to implement the corporate governance and internal security mitigation strategy, if at all.”

In addition to these vicarious liability risks, there is a national movement towards consumer protectionism, especially following the implementation of the Consumer Protection Act (CPA) in 2010, says Meyer. “We are experiencing an increasing trend in litigation with increased awards for damages even where the facts do not support the awards completely.”

Meyer adds that while there are no prerequisites for liability or crime cover to protect from employee dishonesty the Companies Act does require directors to act in the best interest of the company. “This suggests that directors take an objective approach and consider a combination of risk management and mitigation, as well as a risk transfer policy, which includes crime cover together with an element of liability cover for vicarious liability for the actions of their employees.”

While it will be some time before organisations are forced to put liability policies in place that will protect them from legal liability following employee dishonesty, it may be wise to investigate the possible repercussions of a lack of liability and crime cover in the interim. “The depth and extent of the risk transfer mechanism which may be required varies depending on the industry, and management should partner with a reputable insurance broker and underwriter to ensure that they are protected in vulnerable areas and thereby comply with their fiduciary duties towards the company and other stakeholders,” concludes Meyer.