Holiday sales drive volume, foot traffic, and revenue—but they also quietly open the door to one of retail’s fastest-growing threats: returns fraud. While shoplifting and cyber fraud get most of the attention, return abuse and internal fraud consistently drain margins without triggering immediate alarms.
Because these losses are spread across transactions, many retailers don’t recognize the impact until months later, often after profitability has already been eroded.
What Is Retail Returns Fraud?
Returns fraud occurs when individuals exploit return policies to receive refunds or store credit they are not entitled to. This includes returning stolen merchandise, using fake or altered receipts, “wardrobing” (using items and returning them), refund theft, and return manipulation by employees.
During the holiday season, relaxed return policies and higher transaction volumes make these schemes easier to execute and harder to detect.
Why the Holidays Create Perfect Conditions
Holiday operations are fast-paced and high-pressure. Temporary staff, long lines, extended hours, and customer-first service standards reduce scrutiny at the register. Retailers often prioritize speed and satisfaction over verification, unintentionally creating opportunities for abuse.
Additionally, generous holiday return windows allow fraudulent activity to surface weeks or months after the original sale, masking the true source of loss.
Employee Involvement Increases Severity
Some of the most costly return fraud involves employee participation. Cashiers or supervisors may override systems, process fraudulent refunds, or collude with third parties. Because employees understand internal controls, these schemes can persist undetected.
Employee dishonesty claims frequently result in higher dollar losses than external theft, especially when fraud continues over an extended period.
The Impact on Margins and Inventory
Returns fraud affects more than cash flow. It distorts inventory records, increases shrinkage, and complicates forecasting. Returned items may be damaged, unsellable, or improperly restocked, creating additional hidden losses.
Over time, these issues undermine pricing strategy, supply chain planning, and profitability—especially during peak sales periods.
Why Standard Property Insurance Isn’t Enough
Many retailers assume theft-related losses are covered under property insurance. In reality, most property policies exclude employee dishonesty and financial fraud. Losses from fraudulent refunds, cash manipulation, or collusion are typically not covered without a dedicated crime policy.
This coverage gap leaves retailers exposed precisely where losses are hardest to detect.
How Crime Insurance Responds
Crime insurance can provide coverage for employee dishonesty, forgery, funds transfer fraud, and theft of money or securities. When properly structured, it can respond to losses caused by fraudulent refunds, internal theft, and certain third-party schemes.
Coverage response depends on definitions, exclusions, and limits. Retailers with high transaction volume should ensure crime limits reflect realistic exposure.
Internal Controls That Reduce Returns Fraud
Insurance works best when paired with prevention. Strong internal controls include receipt verification protocols, return limits, separation of duties, exception reporting, and audit trails. Employee training and clear accountability also reduce risk.
Technology solutions such as transaction monitoring and anomaly detection can further limit exposure.
Documentation and Detection Matter
Returns fraud often goes undetected because documentation is inconsistent. Clear refund policies, transaction logs, and exception reports help identify patterns early. The sooner fraud is detected, the smaller the loss.
Prompt reporting also improves the likelihood of insurance recovery if coverage applies.
How Skyscraper Insurance Helps Retailers Protect Margins
Skyscraper Insurance works with retailers to identify where returns fraud risk exists and whether current crime coverage responds appropriately. We review policy structure, sublimits, and exclusions while also advising on risk management improvements.
Our goal is to help retailers protect profits during their busiest—and most vulnerable—season.
Don’t Let Returns Undermine Holiday Success
Holiday sales should strengthen your bottom line, not quietly erode it. Returns fraud is predictable, preventable, and insurable when addressed proactively.
Now is the time to review your return processes and crime coverage before losses multiply.
