Ask most business owners what their biggest fraud risk is and they'll say external criminals — hackers, scammers, fraudulent suppliers. The reality, confirmed by global and local data, is that the biggest fraud risk for most businesses is someone they trust completely: their own staff.
Fidelity insurance — also called employee dishonesty insurance — is designed to protect your business against the financial consequences of this uncomfortable truth.
What fidelity insurance covers
A fidelity policy typically covers direct financial losses arising from fraudulent or dishonest acts by your employees. This includes: - Embezzlement of company funds over time - Theft of cash from registers or petty cash - Fraudulent invoicing (creating fictitious suppliers and paying themselves) - Payroll fraud (ghost employees, inflated hours) - Theft of stock or physical assets - Forging payment authorisations
The scale of the problem
Comprehensive business fraud statistics are not widely published locally, but international research provides a guide: the Association of Certified Fraud Examiners (ACFE) reports that the typical business loses 5% of revenue to fraud annually. The median loss per case exceeds $100,000, and the average fraud runs for 18 months before detection.
For a business with $2 million in revenue, that's potentially $100,000 per year in undetected losses.
Who commits employee fraud?
The ACFE's data is counterintuitive: the most common fraudster profile is a trusted, long-tenured employee with no prior record. The longer someone has been with an organisation, the more opportunity and the more trust — and the longer a fraud can go undetected. Senior employees commit larger frauds on average than junior staff.
Internal controls aren't enough
Many business owners believe that having financial controls in place — segregation of duties, dual authorisation, regular audits — is sufficient protection. Controls are important and they do deter and detect fraud, but they're never perfect.
Fraudsters adapt to controls. Long-tenured staff understand the weaknesses in your systems. And in small businesses, true segregation of duties is often impossible — the same person may manage the books, write cheques, and perform the bank reconciliation.
Fidelity insurance provides the financial backstop when controls are circumvented.
What fidelity insurance doesn't cover
Standard fidelity policies cover "direct loss" — the money or assets you've actually lost. They typically don't cover: - Consequential losses (lost profits, business interruption) - Losses that occurred before the policy started (prior acts exclusion) - Losses where you can't establish an employee committed the act - Cyber attacks from external parties (requires cyber insurance)
How to get fidelity insurance
Fidelity insurance is available through specialist brokers, including Rothbury Insurance Brokers and Unite Insurance. Premiums for SMEs typically start from around $800-$2,000 per year for basic cover.
When applying, insurers will ask about: - Number of employees (particularly those with financial access) - Annual turnover - Financial controls in place (segregation of duties, audit processes) - Prior fraud history
Better controls generally mean lower premiums — which is another reason to implement them.
The conversation to have with your broker
When reviewing fidelity insurance, ask your broker about: - Discovery period — how long after a policy ends can you still make a claim for fraud that occurred during the policy? - Limit adequacy — is your limit high enough for a worst-case scenario? - Voluntary disclosure — what if an employee confesses rather than being caught? - Extended cover options — can the policy cover volunteers, contractors, or third parties?
Fidelity insurance is not expensive relative to the risk it covers. For most businesses, it is among the best-value insurance coverages available.