Insurance Insights: Employee Freedom … to Succeed to Deceive?

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If you’re a typical self-storage owner, you’re operating a successful business, and your success can be credited to many factors. Careful hiring of facility staff is one, and monitoring onsite business practices is another.

Good employees are essential to a service industry such as ours. The formula for a winning team includes people who are motivated to help the business succeed. It also includes employee authority to conduct tasks and the means by which to get the job done. Unfortunately, with that freedom comes the opportunity for employee dishonesty, which can be costly for your business. It often results in direct loss of money or business-personal property and harm to your professional reputation.

Fortunately, you can respond to this business risk through insurance and business practices that don’t require you to restrict the latitude given to employees to run a successful business. You’ve already taken the first step by becoming aware of the potential for loss. Now let’s look at some of the areas of vulnerability and ways to respond.

Background

Reducing your risk of loss from employee dishonesty begins with your hiring practices. Your employment application should ask for work history and references, and you should always follow up on this information. Background criminal checks are available through outside services and are recommended, especially if your employee will have access to tenants’ personal information or will be handling rental payments and credit card transactions.

Independence Breeds Opportunity

The typical storage facility doesn’t have a large staff. A manager is required to handle many aspects of daily business operation. The person behind the counter will often act as the rental agent, cashier, arbiter of tenant complaints and enforcer of delinquent-account procedures. Facilities that have just one person performing multiple functions daily or for long, unaccompanied periods of time are particularly vulnerable to loss from employee dishonesty. This is when independence means meets opportunity.

Some of the most common causes of loss from employee dishonesty include:

Untracked Rentals: A facility manager might rent out one or more units, not turn in rental documentation, and keep the income. Facilities with numerous tenants paying in cash are particularly vulnerable to this type of activity.

Diverting Rental Income: This occurs when an employee receives rent for a unit but does not apply the payment to the account. As with the rental of untracked units, facilities operating in a cash environment are more susceptible to this source of loss. Diversions are sometimes disguised: An employee may debit one tenant’s credit card account to cover the diverted cash payment from another. This practice compounds the problem of employee theft with credit card theft.

Credit Card Theft: In addition to diverting credit card payments to cover other accounts, the practice of employees using tenant credit card information for their own purchases, even selling credit card information to counterfeiters, is now a growing concern.

Other Undocumented Cash Transactions: The typical self-storage business produces income from auxiliary transactions, such as the sale of locks, boxes and packing materials. Failure to document cash transactions can be a source of loss to your business.

Checks and Balances

What’s an owner to do? The best way to respond is to incorporate a system of checks and balances that will deter most employees from attempting this type of activity or catch any problems before they’ve gone too far. The system should allow you to monitor rental activity and sales inventory and check them against your records.

Procedures should be clearly stated and followed for all financial transactions. Increased delinquencies, higher than expected vacancy rates, declining sales of ancillary products, and inventory shortages are signs it may be time to bring in an outside auditor for an independent checkup.

“Motivation” is a word we often use when describing the positive qualities of an employee. However, an unhappy employee may be motivated in a way that’s harmful to your business. Clearly written procedures and guidelines reduce your exposure to the general legal liabilities associated with employment practices, and may also help reduce staff discontentment. Stay close enough to your employees to know when someone might be suffering from increased financial pressure.

Cover Your Losses

Neither a well-developed system of operational procedures nor a positive employee-employer relationship can guarantee your business won’t be a victim of employee dishonesty. Employee theft is an unfortunate reality that adds billions of dollars to the cost of doing business each year. Although self-storage businesses grant employees the authority to carry out their jobs, opportunities for theft are often present.

The good news is the actual incidence of loss due to employee dishonesty is not high. This fact is reflected in the relatively low cost of insurance protection for this type of loss. Loss of money, business property or the property of your tenants is not insured by the general property-insurance coverage in your business policy. However, most of the specialty policies that insure business-property and liability exposures for self-storage offer optional coverage for loss from employee dishonesty for a modest additional premium.

Employee dishonesty or fidelity coverage is not a substitute for good procedures and documentation. But when the chips—your chips— are down due to employee theft, this optional coverage can be valuable in helping you maintain a profitable bottom line. Check with your agent to see if your policy already provides this protection for your business and, if not, get a quote to add employee-dishonesty coverage to your existing insurance package. 

Scott Lancaster started his insurance career in 1976 as a licensed insurance agent and broker in California. He is now the regulatory compliance officer for Deans & Homer, where he was hired as a commercial lines property and casualty underwriter in 1985 and has worked in the self-storage division since 1993. Deans & Homer has been providing insurance products designed to respond to the unique risks of the self-storage industry since 1974. For more information, call 800.847.9999; visit www.self-storage-insurance.com

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