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									LABOR & EMPLOYMENT NEWSLETTER - One Bad Apple Can Ruin a Company

         PREPARED BY
                                               One Bad Apple Can Ruin a Company
                                               Expect the unexpected. In business, as in life, we all too
                                               often learn that lesson the hard way. Changing market
                                               conditions, natural disasters or major accidents can rapidly
                                               work to cripple a business. But a rogue employee can have
                                               an effect just as crippling.

                                               A “bad apple” can harm a business in a variety of ways. An
                                               employee can commit a crime against the business, commit
                                               a crime against the public while on the job, or even commit
        Kevin Robinowitz
                                               a crime for the business. Each act harms the business in its
         901 Main Street                       own unique way, and merits a different response. But
           Suite 4400                          proactive crisis management can help reduce the impact to
         Dallas,TX 75202                       a business.

         214.651.2041                          One traditional method of risk management is to buy
       kevin.robinowitz@                       insurance. For example, a business can purchase
                                               commercial liability or fidelity insurance to help protect it
                                               against losses stemming from a security guard’s assault or a
                                               salesman’s embezzlement. But the insurance will not
                                               provide any protection unless it actually covers the loss. Any
          Tiffany Hildreth
                                               business relying on insurance as its first line of defense
             Kim Moore                         would be well served by evaluating its policies, to ensure
                                               that coverage will be available if necessary. While there is
                                               no replacement for advice of legal counsel, a simple
                                               evaluation may often be accomplished by consulting with
                                               the insurance broker, and asking him or her to help explain
       Katie Anderson
                                               what is covered.
   Francine Breckenridge
        Jerae Carlson                          Fidelity policies, also sometimes called commercial crime
     Tiffany L. Hawkins                        policies, are designed to protect against employee
       Tiffany Hildreth                        dishonesty, but they have important limitations to coverage
       David N. Kitner                         which are often little understood by the insured business.
          Brad Kizzia                          Such policies often exclude coverage for employees who
                                               have committed prior dishonest acts, if known to the
          Kim Moore
                                               employer. For example, a business that knowingly hires an
          Paul Myers                           employee with a record of crimes involving dishonesty, such
      Kevin Robinowitz                         as check fraud or theft, will often not be covered against
    Martin Thornthwaite                        losses later arising from that employee’s dishonest acts.
                                               Similarly, an employer that discovers expense account fraud

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LABOR & EMPLOYMENT NEWSLETTER - One Bad Apple Can Ruin a Company

        Monica Velazquez                       or even minor theft of company property but gives its
          Jana Woelfel                         employee a second chance may not be protected by fidelity
                                               insurance against subsequent dishonest acts by that
         Printer friendly page
                                               Courts have long upheld provisions such as those which
         View as Acrobat PDF                   provide for exclusions as to employees about whom the
        Subscribe: RSS Feed                    employer had knowledge of any fraudulent or dishonest act.
                                               See, e.g., St. Joe Paper Co. v. Hartford, 376 F.2d 33, 35
                                               (5th Cir. 1967). While an employer may think that it has
                                               been thorough in complying with the Fair Credit Reporting
                                               Act while obtaining a background check, a failure to address
                                               a report of a fraudulent or dishonest act may trigger a
                                               policy’s exclusion. A careful employer should evaluate its
                                               coverage, and, if necessary, seek a rider specifically
                                               extending coverage to an individual with a prior bad act, or
                                               be prepared to deal with the consequences.

                                               At times, employers are confronted with unsubstantiated
                                               allegations of wrongdoing. While employment relationships
                                               in Texas are presumed to be “at-will” absent an employer’s
                                               specific agreement to the contrary, many employers are
                                               hesitant to fire an employee on a mere allegation. But
                                               investigating allegations of illegal conduct can carry its own
                                               set of risks. Depending on how an employer conducts its
                                               investigation, it could expose itself to a claim for defamation
                                               or for violating the Employee Polygraph Protection Act of
                                               1988. Seeking legal counsel at the outset of an investigation
                                               can spare an employer from many subsequent headaches.

                                               Employees who take it upon themselves to break the law in
                                               a misguided effort to help the business can be the most
                                               harmful of all. From the supervisor who directs the dumping
                                               of toxic waste to the vice president who defrauds a vendor,
                                               these employees can cripple a business. Employers should
                                               promptly seek counsel in an effort to determine, among
                                               other things, whether an independent investigation is
                                               necessary, or whether the employer has an obligation to
                                               notify the authorities.

                                               Businesses can also face exposure when an employee asks a
                                               subordinate to break the law. In Sabine Pilot Services, Inc.
                                               v. Hauck, an employee claimed that he was fired for
                                               refusing to pump bilges from his employer’s boat directly
                                               into the water. The employee sued for wrongful termination,
                                               and the Supreme Court of Texas created a narrow exception
                                               to the at will employment doctrine, allowing for a wrongful
                                               discharge claim where an employee was fired for the sole
                                               reason that he refused to perform an illegal act. Sabine Pilot
                                               Services, Inc. v. Hauck, 687 S.W.2d 733, 735 (Tex. 1985).

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LABOR & EMPLOYMENT NEWSLETTER - One Bad Apple Can Ruin a Company

                                               Regardless of the crisis’ cause, a good crisis management
                                               approach will not be static. Circumstances can rapidly
                                               change as an employer learns new facts. Evaluating whether
                                               coverage exists and providing notice to an insurer, and
                                               managing relations with the public are just a few additional
                                               considerations a business may face while trying to continue
                                               operations. A business should be prepared to address the
                                               impact of the crisis on multiple fronts, not only managing
                                               exposure to claims, but also ensuring that it does not make
                                               a bad situation worse through its own handling of the crisis.
                                               A business may not be able to control when it falls victim,
                                               but it can always control its response.

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