As employee theft, electronic fraud, forgery and other organisational crimes surge, businesses increasingly face issues in the aftermath. This often involves making a claim and preparing a proof of loss under a commercial crime insurance or a related policy.

MinterEllison offers valuable insights to help you to create a strong proof of loss, maximising the potential recovery under an insurance policy

Understanding the landscape

Businesses at all levels and across all industries encounter criminal activity that may have a negative impact on the organisation (financially and reputationally), as well as its customers or clients. These activities may include wrongful acts perpetrated by employees and others who act in collusion with them, or by external parties.

In September 2022, Warfield & Associates published their seventh major fraud research study, which examined employee fraud between August 2012 and August 2022, where over $1 million was stolen, resulting in the perpetrator’s criminal conviction. The study found that several cases involved at least $10 million being stolen, and the largest amount stolen was an astonishing $27.4 million. The most common types of criminal activity perpetrated were false invoicing and electronic funds transfer fraud, and banking and financial services was the most adversely impacted sector. Alarmingly, in just over half of the cases the fraud took more than five years to be discovered.

When a business discovers criminal activity perpetrated against it, one of the key steps commonly taken is to notify a claim under a commercial crime insurance or similar policy. As part of the insurance claim, it is a standard requirement to provide the insurer with a proof of loss. This article addresses how your business can prepare an effective proof of loss and other key considerations in dealing with commercial crime.

What is a proof of loss?

After a business notifies a claim under a commercial crime insurance policy or similar policy, it is a usual requirement under such a policy to provide the insurer with what is commonly described as a ‘proof of loss’. A proof of loss is a document (or series of documents) intended to set out when and how the crime was committed, the financial loss experienced by the business, and establish how the business believes that the policy covers the loss.

The proof of loss typically includes supportive documentary evidence. The nature of documentary evidence required can vary according to the circumstances of the case; it might include account statements, invoices, receipts, cheques, internal investigative reports or forensic accounting reports and police statements.

Preparing an effective proof of loss

A comprehensive proof of loss is a key way for a business to maximise its potential recovery under its insurance policy after experiencing criminal activity. Some key tips and considerations for preparing an effective proof of loss are as follows:

• Review policy requirements: The insurance policy may provide detailed or prescriptive requirements that must be addressed as part of the proof of loss, including particular documents or evidence that must be provided or format specifications. If your proof of loss does not adhere to specific requirements set by the insurer, there may be a risk that this will detract from or delay the recovery of the loss. If in doubt, it may be appropriate to seek clarification on the requirements from the insurer.
• Engage an investigator: In some cases, it may be necessary to appoint an investigator to assist in determining and proving the amount of the loss. A common example is a forensic accountant or investigator who can assist the business to capture and analyse digital data, documentation and accounts in order to secure the evidence required to substantiate the claim for loss. Many commercial crime insurance policies include an extension of cover for the costs and expenses of an investigator to investigate and establish the amount of the loss. These expenses may require the insurer’s prior approval, and may be subject to a sub-limit or deductible. It is common for this cover to expressly exclude internal overheads or remuneration connected with seeking investigative assistance.
• It’s all in the detail: The business should give great care and attention to including a comprehensive and appropriate level of detail and underlying evidence regarding the discovery of the loss, the subsequent investigation and the amount of the loss. A chronology and use of tables, ensuring to cross reference to annexed underlying evidence or documents, can be an effective way to clearly and comprehensively set out the necessary information. Ensuring that all key dates and amounts are included and carefully checked is vital to avoid errors. When identifying losses to be claimed, explain how each loss falls to be covered by the policy (bearing in mind any relevant policy exclusions), establish causation (that the criminal act directly caused the loss) and provide underlying evidence. It is common for insurers to reject proof of loss where solely dependent upon profit and loss comparisons or comparisons of inventory records against a physical count.
• Anticipate insurer queries: When preparing the proof of loss, it is important to put yourself in the ‘shoes’ of the insurer and to the extent possible pre-empt and address any queries the insurer might have. Examples of this are identifying and accounting for any discrepancies between underlying documents and addressing clear gaps in evidence.
• Time limits matter: Some insurance policies will require proof of loss to be submitted within a certain period of time (i.e. six months) after discovering the loss or initial notification of the claim. On some occasions that time limit can be extended by agreement with the insurer, but it is best to engage with the insurer in advance of the time limit if there is a possibility it will not be met. It may be necessary to provide an interim proof of loss, with further information or updates provided when additional evidence is available.

Other considerations in managing claims

Beyond the proof of loss, handling commercial crime insurance claims involves other considerations:

• Mitigation: Some policies can impose an express requirement on the insured to mitigate loss, which generally means taking all reasonable steps to reduce, minimise, prevent or avoid the loss. If you are unclear on what is required of you in the circumstances of your claim you should engage with your insurer. Some policies will contain an extension of cover for mitigation costs, provided those costs are incurred with the insurer’s prior consent.
• Recovery: It is common for insurance policies to provide the insurer with the right to pursue and enforce recovery on behalf of the insured. The policy may set out the order of how recovered amounts are to be applied. Some policies provide an extension of cover for the insured to assess and pursue recovery on its own, whilst others may provide that where the insurer pursues recovery it does so at its own costs, or if there is an uninsured element of the recovery the insured must bear that portion of the costs.

How can we help?

MinterEllison's insurance advisory and complex claims group offers integrated end-to-end insurance and reinsurance services. We have acted for insureds that are small to large companies, industry organisations, not-for-profits and individuals. The team understands the broad range of insurance products, from directors' and officers' liability, professional indemnity, general liability, property, commercial crime, warranty and indemnity and cyber insurance and with regulatory inquiries and investigations.

The team can support and advise you with:

• reviews or 'health checks' of insurance policies
• regulatory requirements and compliance
• coverage under insurance policies and assisting in the resolution of disputes with insurers
• defence of insureds in disputes, directly or under instructions from insurers
• preparing for and responding to criminal incidents

For more information, please contact our team.