What Is a Fidelity Bond?
Let me tell you directly: a fidelity bond is a type of business insurance that protects you as an employer from financial losses caused by your employees' fraudulent or dishonest actions. You might hear it called an honesty bond, and it covers both monetary and physical losses.
In places like Australia, it's known as employee dishonesty insurance, and in the United Kingdom, it's fidelity guarantee insurance. That's just how the terminology varies, but the core purpose remains the same.
Key Takeaways
These are insurance policies that shield your company from wrongful acts by employees. Remember, fidelity bonds aren't tradable securities—they don't work like that. They're a key part of your risk management strategy, plain and simple.
Understanding Fidelity Bonds
If your employees commit fraud, your company could face legal or financial penalties beyond what the individual faces. This risk grows with more employees, so you need protection.
That's where fidelity bonds come in—they cover those damages. Though called bonds, they're actually insurance policies. They come in two main designations: first-party, which protect your business from employee wrongs, and third-party, which cover acts by contract workers.
Don't mix this up with regular bonds; a fidelity bond is an insurance policy you can't trade or earn interest on.
You'll find these most often in insurance companies, banks, and brokerage firms, where they're required based on net capital. For banks, it's a banker's blanket bond, covering criminal acts like fraudulent trading, theft, and forgery.
Why Fidelity Bonds Are Used
Consider fidelity bonds as part of your enterprise risk management. They protect your business from losses due to employee fraud or crime against the company or its clients.
This includes theft of cash from your business, stealing from customers, forgery impacting operations, robbery, burglary of your safe, property destruction, or illicit fund transfers. If it happens, the bond steps in.
Types of Fidelity Bonds
Fidelity bonds break down into specific types, each targeting certain risks. The most common is the business services bond, also called a business bond or janitorial service bond. It protects clients when your employees are on their premises—if an employee steals something like a computer during a visit, the bond reimburses the client.
Then there's the employee dishonesty bond, which safeguards your company and clients if an employee misuses sensitive data like Social Security numbers or credit cards.
ERISA bonds are required under the 1974 Employee Retirement Income Security Act. They ensure trustees of pension plans have coverage at least 10% of plan assets to protect beneficiaries from theft or mismanagement in 401(k)s and similar plans.
Some states like Alaska, Michigan, and Texas use another type to encourage hiring high-risk workers—the bond reimburses you if they act dishonestly.
How Does a Fidelity Bond Work?
These are insurance products that give you protection against employee fraud or dishonesty. If a covered event happens, you file a claim, and the insurer reimburses you based on your agreement.
What Are Examples of Fidelity Bonds?
Take the business services bond—it's common and protects against losses when your employee is at a client's site. For instance, if a window repair worker steals jewelry from a home, or a dog sitter takes money, or a home health provider grabs a laptop or clothes, the bond covers your company's exposure.
What Are Two Main Types of Fidelity Bonds?
Business services bonds protect clients during employee visits to their homes or businesses. Employee dishonesty bonds cover financial losses from fraudulent employee activities. Another key one is the ERISA bond, which protects retirement plan beneficiaries from trustee theft.
The Bottom Line
Many businesses need fidelity bonds, either by choice or requirement from their state or locality. Not everyone is honest, so paying the premium gives you peace of mind and reassures customers—it's often worth it.
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