Professional Liability Insurance Can’t Cover Fraud

by | Mar 2, 2016 | All | 0 comments

Professional Liability Insurance Can’t Cover Fraud

What Professional Liability Insurance Can and Can’t Do

Tuesday, March 01, 2016

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Reminder: Engineer Professional Liability Insurance Can’t Cover Fraud

Tuesday, March 01, 2016 / Categories: Architect Professional Liability, Engineer Professional Liability, Small Business Tips

Here’s a story that will strike fear in the heart of any civil engineer or architect. According to a report from the Los Angeles County Sheriff’s Department, two architectural drafters passed themselves off as licensed civil engineers working for the Palos Verdes Engineering Company. The men allegedly stole the firm’s drafting software, civil engineering seal, and company signature and used them to make fraudulent structural engineering plans for residences.

Clearly, the structures built on the con artists’ calculations come into question, and the sheriff’s department estimates that several hundred homes may be unsafe for the people living in them. But the crime also sparks questions about liability. In this case, the suspects were no longer employed by Palos Verdes Engineering, but what if they were?

What Professional Liability Insurance Can and Can’t Do

Architects and engineers often buy Professional Liability Insurance to protect their businesses when clients sue over negligence (i.e., when they allege your professional services came up short). For example, a client might claim you…

  • Failed to draw up their plans correctly.
  • Didn’t oversee their project.
  • Forgot to obtain permits.
  • Offered professional advice that missed the mark.

Not only does your Professional Liability Insurance typically cover claims like these, but it often extends to your employees because their actions are under your direction. The legal term for this is “respondeat superior,” which means, “let the master answer.” You, the employer, are the master, and so you must answer for your employees’ actions as long as the employee is acting within the scope of employment.

However, when your employee commits fraud, they are not “acting within the scope of employment,” so your Professional Liability does not cover it. Truth be told, architect and engineer Professional Liability almost always excludes coverage for criminal activity, even if for some reason you direct an employee to commit a crime. No insurer wants to encourage that.

The next liability question is a bit thornier. What happens if your employee defrauds a client, and that client sues you for hiring a criminal or not supervising your employees enough? Does architect and engineer Professional Liability Insurance help pay for your legal fees then?

It depends. Some policies may provide coverage for negligent hiring or supervision, but others may not. Check with your agent to see what your policy says on the matter.

How Your Engineering Business Can Reduce Fraud Risk

According to the ACFE 2014 Global Fraud Study, 34 percent of small-business owners learn about occupational fraud from a tip. There are two problems with this:

  1. The fraud has already happened.
  2. You have to wait for someone to notice it.

A better choice may be to nip the problem in the bud during the hiring process, according to Efrat Cohen (@SpyEfrat), a licensed professional investigator and certified identity theft risk management specialist at Global Intelligence Consultants, Inc.

“A pre-employment background check has become a much needed prerequisite when hiring new employees,” Cohen says, “but hire licensed investigators who know what to look for. If you obtain a background check from a generic background company, you may not get all the information about an individual.”

In addition to investigating your potential hires, you might also want to:

  • Perform regular audits of your operations.
  • Document your supervision and hiring processes.
  • Limit access to valuable materials.

When your business is small, it can be hard to imagine an employee stealing from you or your clients. Unfortunately, it happens all the time. For example, a survey from Hiscox shows 80 percent of credit card fraud happened at businesses with 50 or fewer employees.

Moral of the story: keep your eyes open and proactively manage your risks.