What Is the Fidelity Bond?
A fidelity bond protects an employer from losses caused by dishonest or fraudulent employees. This insurance, called an honesty bond, covers financial and physical losses.
In Australia, fidelity bonds are called employee dishonesty insurance, and in the UK, fidelity guarantee insurance.
Understanding Fidelity Bonds
A company may face legal or financial penalties in addition to the employee or employees who committed fraud. Therefore, companies, especially those with many employees, risk such penalties.
Firms’ fidelity bonds cover such damages. Fiduciary bonds are insurance, despite their name. They are usually first- or third-party:
- First-party fidelity bonds safeguard businesses from employee misconduct.
- Third-party fidelity bonds protect companies from similar actions by contract employees.
Fidelity bonds are different from regular bonds. This insurance policy cannot be traded or earned interest.
Insurance, banking, and brokerage firms hold most fidelity bonds because they must carry protection proportional to their net capital. Fidelity bonds cover fraudulent trading, theft, and forgery.
Why Use Fidelity Bonds
A business’s enterprise risk management may include fidelity bonds. These insurance policies protect the company from fraudulent or criminal employee actions against the company or its clients.
This includes employee theft of company cash and customer theft. This policy may cover employee forgery that harms the business. Fidelity bonds cover company safe robbery, property destruction, and fund theft.
Fidelity Bond Types
Different types of fidelity bonds cover other things. The most common fidelity bonds are:
- Business services bonds, or janitorial service bonds, are considered the most common type of fidelity bond. They safeguard clients when employees visit. The bond would compensate the client if a company employee stole a computer from a customer’s home.
- Employee dishonesty bonds safeguard companies and clients from misusing personal data, such as Social Security or credit card numbers.
The Employee Retirement Income Security Act (ERISA) of 1974 mandates that pension plan trustees have fidelity bond coverage of at least 10% of the plan’s assets. This rule protects plan beneficiaries from theft or other misconduct by 401(k) and pension plan managers.
Alaska, Michigan, and Texas use another type of fidelity bond to encourage employers to hire high-risk, potentially untrustworthy applicants. If an employee cheats, these fidelity bonds reimburse the employer.
How do fidelity bonds work?
Insurance products called fidelity bonds protect employers from employee fraud and dishonesty. If the policy covers an event, the company would file a claim and get reimbursed according to the insurer’s terms.
Examples of fidelity bonds?
The most common fidelity bond is the business services bond, which protects against losses while an employee is at a customer’s property. The company may be liable if a window repair worker steals jewelry from a storm-damaged home. A fidelity bond could cover the company if a dog sitter stole money from a client’s house or a home health provider stole clothes or a laptop.
Two main types of fidelity bonds?
Two popular types of fidelity bonds are business services bonds, which protect clients when employees enter their home or place of business, and employee dishonesty bonds, which protect companies from financial loss if an employee or group of employees commits fraud. ERISA bonds, common fidelity bonds, protect retirement plan beneficiaries from trustee theft.
Final Thought of Fidelity Bond
Many businesses need fidelity bonds by choice or because their state or municipality requires them. Unfortunately, not everyone is honest, so paying more for peace of mind and customer reassurance is worth it.
- Fidelity bonds protect companies from employee misconduct.
- Fidelity bonds are non-tradable securities.
- This insurance is part of a company’s risk management strategy.