June 8, 2023

An insurance provider has declared that it will not cover the $1 million in damages caused by its client, a human resources (HR) company. This statement comes in response to the HR company receiving accusations from a client about providing an inaccurate background check on an employee. As a result of this failure, the involved employee embezzled the company.

According to the case, an elevator company hired the HR company to conduct a background check for a prospective employee in 2014. The human resources company conducted the background check and did not discover any criminal activity. In 2016, the elevator company requested another background check from the HR company on the same individual. In this report, they found that the person used a false Social Security Number and had a criminal history. This history included forgery, embezzlement, and illegal usage of personally identifiable information.

In 2017, the elevator company revealed that the investigated employee had embezzled $1 million from their company. As a result, they informed the HR company that ran the background checks and filed a lawsuit against the HR company. Aware of this suit, the HR company’s insurance company declared it took place before the insurance policy would go into effect. 

The insurance provider stated that the HR company and its principal could not claim entitlement to coverage under the policy. It also explained that the policy excluded claims that resulted from misappropriated or misused funds. The insurance company also mentioned that the HR company never informed them of the claim. Despite failing to communicate, the HR company sued the insurance company for not defending them against the elevator company’s claim.

The insurance company continued explaining how its exclusion for specific claims applied to the HR company. It provided the following examples of excluded claims: anything resulting from alleged or actual misappropriation, commingling, or improperly using funds. In addition, the insurance company argued about the elevator company’s case. 

It argued that the filed suit concerning embezzlement could apply as an excluded claim by the insurance company. According to the exclusion examples, the insurance company does not require the policyholder to commit the embezzlement for the exclusion to apply. Finally, the insurance company claimed that the HR company admitted it did not report the underlying lawsuit. As a result, the insurance company counted this failure as a further reason to bar coverage.

The outcome of this case remains uncertain. However, the affected companies could have avoided this lawsuit by acquiring a quality background report. This case proves how crucial it is for companies to work with experienced background screening companies. The right partner will provide accurate information for businesses to make informed hiring decisions.

Background checks are made easy with Pre-employ. Ask any questions you may have and learn more by contacting a sales rep today.

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