Uncovering Employee Fraud: Strategies for Recovery

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

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. Crime Pays: Recovering Employee Dishonesty Claims: Other Tools • Civil Litigation

11. 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

12. 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