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There have been a number of articles in the news lately commenting on the relatively large number of U.S. residents who have found ways to run afoul of the law in ways that left them with a criminal record; reportedly, the U.S. leads all first world countries in the percentage of population who have a criminal record. Worth remembering is that not all of these violators are guilty of serious crimes; the definition of “criminal” can include any non-traffic related offense, a broad brush indeed. Nor is a conviction even required, only an arrest that may never have led to charges being filed. And in these days of digital records, nothing is ever forgotten. Youthful indiscretions that in the past might have been handled less formally and eventually forgotten (think shoplifting, pranks that might lead to charges of vandalism, or possession of small amounts of marijuana as fairly typical youthful idiocies) now go into a person’s “permanent record” (ever hear that phrase in school?) and are never forgotten, and always retrievable by a potential employer or almost anyone else with a credit card. And there are also many who might have been guilty of more serious offenses way in the past but with age and maturity have turned their lives around.
This is a problem for the affected individuals, but its also a problem for any business that might wish to employ them. There is a practical issue here, if you are one of those employers with positions to fill that require specific skills or experience; if you automatically disqualify for criminal records your pool of potential applicants may get much smaller. More broadly, employers who might have in the past been inclined to automatically disqualify for employment any applicant with a criminal record are under increasing pressure to take a more nuanced approach.
While that may be a socially desirable approach that a responsible employer might want to consider for both altruistic and practical reasons, there is a downside. We have written in the past about a severe but often overlooked risk that businesses face from employee dishonesty losses. Theft, embezzlement, illegal conversion of business funds or property and other employee crimes cost businesses millions each year (some industry sources have estimated that annual losses from employee dishonesty exceed those from fires). One can only assume that, no matter the nature of the violation or length of time passed since a criminal violation occurred, an employee with a record likely presents some level of increased risk for an employee dishonesty loss.
Of course your well thought out insurance program includes an employee dishonesty policy, but if you are relying on that to cover you if you suffer a loss from an employee with a record, better think again. Most employee dishonesty policies indicate that coverage ceases for any employee immediately upon discovery by the policyholder of a dishonest act committed by that employee. The relevant wording of the exclusion in the standard Insurance Services Office commercial crime policy form is as follows:
“Exclusion 1. b. Acts Of Employees Learned Of By You Prior To The Policy Period
Loss caused by an “employee” if the “employee” had also committed “theft” or any other dishonest act prior to the effective date of this insurance and you or any of your partners, “members”, “managers”, officers, directors or trustees, not in collusion with the “employee”, learned of that “theft” or dishonest act prior to the Policy Period shown in the Declarations.” (italics added).
Translated from insurance-speak, that means that if you do a criminal background check on a prospective employee, find something, and go ahead and hire them anyway, your chances of ever recovering on an employee dishonesty claim involving that employee may be impaired.
This exclusion has the potential to trip you up in other ways, too. We have encountered instances where an employee has been caught in a dishonest act, and the employer has chosen to resolve the situation without presenting an insurance claim. Theoretically these could be incidents as innocuous as stealing office supplies or padding an expense account. After a period of time, the same employee perpetrates another theft against the insured, and for this a claim is presented. If a look into the employee’s personnel file revealed the prior dishonest act that had been discovered previously, coverage for that employee disappears.
The key to remember here is that the term “dishonest act” is not defined in the policy, which gives a claims adjuster wide latitude in interpretation of the exclusion. One could reasonably expect that the closest scrutiny of this definition would occur with the largest claims.
There are some work-arounds for this problem, so this is not an insurmountable issue but its not something you should ignore or overlook. If you have an employee you know to have a criminal record or other prior history or have reason to consider hiring one, and would like to have your employee dishonesty policy cover them, call us and we’ll see what we can do for you.