Inferring Dishonesty: The Fifth Amendment and Fidelity Coverage

Insurers have responded by selling employee-dishonesty or fidelity policies, which reimburse the insured for its monetary loss from the dishonest or fraudulent acts of its employees (or others in positions of trust). When claims arise, most fidelity policies require the insured to submit a detailed, sworn proof of loss. The preparation of such a proof may require the insured to conduct a significant investigation into how the loss occurred and to monetize its claim.

Where there is patent embezzlement, such as where funds are improperly disbursed by the company and are ultimately found in an employee's personal bank account, insurers routinely pay claims with little dispute. When more complex claims are involved, such as when an employee and co-conspirators participate in an elaborate fraudulent scheme, insurers often question whether the entire loss claimed is covered, usually contending that some portion of the loss resulted from the exercise of poor business judgment, rather than from covered dishonesty. See, e.g., Building One Serv. Solutions v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 02-311-A (E.D. Va. Nov. 26, 2002) (Memorandum Opinion), reprinted in Mealey's Litig. Emp. Liab. Ins. Rep., at Sect. H (Dec. 13, 2002). In such circumstances, insurers often refuse, absent litigation, to pay some or all of the loss.