Fidelity guarantee claims:
how an embezzlement is quantified.

Employee fraud rarely announces itself. It is usually detected months later, when a reconciliation does not balance, a customer complains about a payment they say they made, or an audit unearths a pattern of irregular writes-off. When the employer turns to a fidelity guarantee policy, they discover that the policy does not respond to a vague sense of shortage — it responds to a specific employee's dishonesty, proved to a standard an insurer's claims department (and, if it gets there, a court) can accept. The entire claim, in practice, is an accounting exercise. This article sets out how it is conducted.

What a fidelity guarantee policy actually covers

A fidelity guarantee insures an employer against direct financial loss caused by the dishonesty — theft, fraud, embezzlement or forgery — of named employees in specified positions, while handling the employer's money and other property in the course of duty. The word named matters. The policy schedule lists the covered employees and the limits. It is not a general "someone took something" policy.

Equally important are the exclusions, and they appear in nearly every form on the Ugandan market. The classic ones are: loss of which there was unexplained shortage only, without identification of the responsible employee; dishonesty discovered by the employer before the policy inception or known about at placement; claims arising from the employer's failure to maintain the checks, controls and procedures stipulated in the policy; and losses that are merely the consequence of bad debt or business failure rather than dishonesty. The insurer's obligations can also be conditioned on the employer's books being properly kept — which, as we shall see, is where most quantification begins.

The claim begins at the date of discovery

Fidelity policies are written on a discovery basis: the loss is covered if the dishonesty is discovered during the policy period, whether or not the acts themselves began earlier. That makes the date of discovery the single most important fact in the file. It drives notification deadlines (generally within thirty days or as the policy specifies), the obligation to give the insurer particulars of the loss and of the evidence available, and the limit under which the claim is settled.

The prudent employer does four things the day a defalcation is suspected: secures the books and records of the affected unit; suspends the employee in question so that records cannot be altered further; notifies the insurer in writing within the policy's time limit, with a preliminary statement of the amount believed lost; and, where theft is alleged, notifies the police. Doing nothing while "investigating internally" is the most common way employers destroy their own coverage — delay is treated as a condition breach, and a shortage that cannot be fixed to a date fails the discovery test entirely.

Quantifying the shortage: reconstructing the books

Once notification is made, assessing the amount is a forensic reconstruction, and the assessor's output is a document usually called a shortage statement: a schedule showing, period by period, what the covered employee should have accounted for against what was actually banked or stock-checked. The building blocks are the accounting records of the business — sales and collections journals, receipts issued, banking slips and deposit advices, ledger balances, cash counts, and stock records where the defalcation involved goods.

In practice the exercise follows a recognisable sequence that forensic accounting firms describe in their guidance:

1. Understand the business and its accounting. How does cash move from customer to bank through this employee's hands, and what records record each step?
2. Establish how the fraud was detected. The detection event fixes the discovery date and often reveals the manipulation pattern — teeming and lading, suppressed sales, inflated write-offs, unreconciled advances.
3. Test the internal controls. Was there segregation of duties, independent banking, periodic verification? This determines whether the manipulation is attributable to the named employee or could have been anybody.
4. Reconcile to a quantum. Compare expected collections against actual banking, adjusted for legitimately outstanding amounts, credits, refunds and the employee's own statements.
5. Account for repayments and recovered property. Confessional repayments, salary offsets and recovered assets all reduce the claim, and the insurance responds net of them.

Why "unexplained shortage" claims fail

The most frequent frustration for employers is that an audit finds a gap in the accounts — money is simply missing — yet no single employee can be connected to it. Under a fidelity guarantee that is a scheme liability problem for the employer, not a fidelity claim, because the policy requires identification of the defalcating employee and direct loss caused by their dishonesty. Where the shortage could have arisen from poor records, unclear procedures or any of several employees, the assessor has nothing to tie the loss to the bond.

This is why the employer's own period checks matter before any loss occurs. Insurers' claims guidance emphasises that whether the employer maintained the checks and controls stipulated in the policy is a condition of liability — a business that cannot show it reconciled monthly, banked independently, and supervised its accounts holder will find even a well-documented fraud contested. The claims file should therefore include not just the accounting reconstruction but the payroll and staff records, the internal inquiry or disciplinary report, the police statement where one exists, and evidence of the controls in operation.

What the assessor looks for on the ground

An assessment is not an audit, but it borrows the auditor's discipline. The assessor typically interviews the staff who discovered the irregularity, examines the relevant books and reconciliations, verifies the identity and responsibilities of the accused employee against the policy schedule, and checks the timing against the discovery deadline. Where a confession exists, its reliability is weighed against the books — a confession is corroborated evidence, not the amount itself. Where the police or the employer's internal committee has already computed an amount, the assessor still re-derives the figure independently, because the insurance payment is dictated by the policy's definition of loss, not by the committee's arithmetic.

The honest employer should also anticipate the deduction side: sums owed by the defalcator to the employer, admitted repayments, and any property of the employer in the employee's hands are routinely set against the gross loss before the amount of the claim is arrived at. And because the policy covers only loss actually and directly incurred, costs of investigation and audit are only reimbursable if the policy expressly extends to them.