An investigation by the Wall Street Journal reveals the little-known role that insurance companies play in shaping employer policies on hiring people with a criminal record.  Joe Palazzolo reports in “Criminal Records Haunt Hiring Initiative” that the “unseen hand of commercial insurers” frustrates efforts by some employers to implement fair hiring policies, and gives others an excuse for maintaining broad prohibitions on hiring convicted individuals.  “An employee is typically excluded from standard insurance policy against fraud, theft, embezzlement and other crimes—known as a fidelity bond—as soon as the employer discovers that he or she has committed a dishonest act, whether recently or in the past.”

The extent of the problem is illustrated by the story of Louis Henry, an Alabama man who lost a sales-management position at a medical-technology company after one day on the job, when a background check revealed a dated conviction for misreporting the status of a loan on the books of a bank where he worked.   “A May 1 letter from the employer, reviewed by The Wall Street Journal, said Mr. Henry’s record placed the company in violation of its insurance policies.”

While working at a community bank in Childersburg, Ala., in the 1990s, Mr. Henry reported in a regulatory filing that one of the bank’s loans was current when, in fact, it was 30 days past due. Mr. Henry said he had no relationship with the borrower but pleaded guilty to avoid legal costs, even though he knew that plea would lead to his being banned from the banking industry.

Financial institutions are largely prohibited by federal law from hiring employees with convictions for crimes of dishonesty, absent a waiver by the Federal Deposit Insurance Corporation. But Mr. Henry says he didn’t know the conviction would dog him in other industries, too.

“When do you quit paying for a mistake?” said Mr. Henry, who is 55 years old. “There’s got to be some sort of statute of limitations.”

Insurers appear unfazed by the growing body of research that challenges the notion that ex-offenders are an indefinite liability to employers:

“I think insurance companies would probably agree with that research, but what they would not do is change a policy form that has been in existence for over 70 years and has had virtually everything in it litigated,” said Theodore M. Pappas, president of the McLaughlin Co., a Rockville, Md.-based insurance agency.

The investigation documents the wide range of responses on the part of insurance executives to the public policy conundrum created by the conflict between second chance policies and longstanding liability practices.  One executive, whose firm works with the Federal Bonding Program, noted that insurers may grant waivers, agreeing to cover employees with long-ago or low-level offenses, like shoplifting. “I think that a lot of times the insurance and the bond questions are used as an excuse not to hire an ex-offender,” he said.

Another believes that fidelity insurance has “evolved hugely” since the early 2000s, when any theft or fraud conviction in an employee’s background would have canceled coverage: “Now, a theft conviction for which the amount stolen was less than $1,000 doesn’t automatically exclude an employee from coverage. Some employers negotiate a higher threshold—say $25,000 or less—by paying a higher premium.”

Some employers are being advised by their lawyers that categorical refusals to hire people with a criminal record could violate federal employment-discrimination laws:

A company policy that says “‘We don’t hire felons’ is pretty much like saying, ‘Sue me,’” said Jonathan A. Segal, a partner at Duane Morris LLP, who represents employers. “And ‘the insurer made me do it’ doesn’t work.”

Some employers have figured out a way around insurer limits to pursue a fair employment policy they endorse:

B.J. Patterson, chief executive and owner of Pacific Mountain Logistics LLC in Ontario, Calif., said six employees on his staff have criminal records and are barred under his liability-insurance policy from working in the warehouse that receives imports.

“Some of my best employees are what I call my second-chance guys and gals,” Mr. Patterson noted. “I think it’s a lot cheaper to give them a job than to keep building more prisons.”

But many insurance companies don’t seem to have gotten the memo:

Shirley Patrick, a senior account manager at iLink Business Management, a Hasperia, Calif.-based staffing company, said her insurance through American Zurich Insurance Company won’t cover workers with a felony conviction. “We’ve got so many unemployed people in the state of California. Do I have to make exceptions for Jim when I might be able to talk to Joe and he’s qualified and I don’t have to mess with these issues?” Ms. Patrick said. “I don’t need baggage.”

Robyn Ziegler, a spokeswoman for the American Zurich Insurance Company, a subsidiary of Zurich Insurance Group Ltd., said the insurer doesn’t identify customers but that “most crimes policies do not cover employees with a known prior felony record.” Coverage may be reinstated, however, based on an employee’s “individual circumstances,” she said.