What is a fidelity bond?
A fidelity bond differs from many other types of bonds because it’s more like insurance than a three-party surety contract. Fidelity bonds protect employers from damages associated with losses that employees cause. For example, if an employee acts dishonestly or commits fraud and causes you or your clients harm, your surety bond will offer you financial protection.
In short, fidelity bonds are insurance policies that act as a form of company risk management, protecting business owners from employee dishonesty and theft. A fidelity bond may also go by other names, including “employee dishonesty insurance” or “honesty bond.”
Examples of Employee Dishonesty:
Illegal Funds Transfers
Who needs fidelity bond coverage?
Any business with employees should consider purchasing a fidelity bond for extra protection, especially financial companies and business service providers that regularly access client property. The following organizations must hold fidelity bonds proportional to their net capital to cover theft, forgery, and fraudulent trading.
Some fidelity bonds work differently than others. While certain bonds protect your business from employee misconduct, others protect your clients from the same thing. If your business requires bonding, but you choose to skip taking the precaution, you could face financial and legal penalties.
How much do fidelity bonds cost?
Fidelity bonds often cost around 0.5-3% of the bond amount required. The size of your bond will depend on various factors, including the size of your business, the number of employees, and the amount of sensitive information you manage. The larger your bond size, the more coverage you’ll have for embezzlement, theft, and other forms of employee dishonesty that lead to financial loss. You also have options when it comes to the type of coverage you choose:
- Blanket position bond: Provides the same coverage for all employees
- Name schedule bond: Provides specific coverage for every individual employee
- Position schedule bond: Provides a particular amount of coverage for each type of employee (i.e., for different positions)
A small business might pay as little as $100 or a few hundred dollars annually, while a large company could pay over $1,000.
Types of Fidelity Bonds
Employee Dishonesty Bond
Employee dishonesty bonds protect businesses by guaranteeing financial compensation if employees or non-employees steal money, property, or securities or commit fraudulent acts. Your business can collect reimbursement for any covered losses by providing proof of loss.
Home Care Organization Dishonesty Bonds
Home care organizations and companion agencies are often required to post a surety bond to become licensed or registered in a state. These bonds protect patients and homeowners from employee misconduct (theft, fraud, forgery, etc.). The victim of a crime can file a claim on the bond to receive compensation for the damages your employees cause.
An ERISA fidelity bond protects your employees’ retirement plan assets from losses caused by fraud or dishonesty. You may need this bond to comply with the Employee Retirement Income Security Act. If a manager or other party mismanages your employee’s retirement plan, the surety bond protects that employee from suffering the loss by replacing stolen funds.
Frequently Asked Questions
There are two types of fidelity bond designations: first-party and third-party. First-party fidelity bonds protect businesses directly from employees who commit wrongful acts. Third-party fidelity bonds protect employers from individuals they employ on a contractual, rather than full-time, basis.
A fidelity bond is a type of business insurance policy that protects employers from losses caused by employee fraudulent or dishonest acts. It offers coverage for physical and monetary losses.
ERISA bonds, employee dishonesty bonds, and business services bonds are the most common types of fidelity bonds.