Fidelity Bonds

Fidelity bonds protect a business from any wrongdoing on the part of an employee. They are often used to cover things such as theft and property damage, but there are different types of fidelity bonds that also cover things such as embezzlement and fraud from higher-ranking employees within a major company.

What are the requirements for fidelity bonds?

Even though they are referred to as “bonds,” they are different from surety bonds. While a surety is purchased by a business to protect its clients, a fidelity protects the business itself. They protect businesses from a loss of company monies or property from employees who intend the company to sustain a loss and obtain an improper financial benefit for themselves or another party.

The bonds cover many of the same things that are covered by basic crime insurance policies such as burglary and theft, but they also cover things that these policies might not. This includes things such as fraud, forgery, embezzlement, and many other “white collar” crimes that can be committed by employees in financial institutions and large companies.

Fidelity can be a blanket bond that covers all of the employees within a company, or it can be for one employee on an individual basis. An insurance company can also set certain guidelines for a business based on its hiring practices, and the protections provided by a bond will only remain in place as long as the duties of the covered employees remain the same. In other words, an employee who is covered by a fidelity may not be covered should that employee accept a different position within the same company.

Should a company sustain a loss due to some kind of wrongdoing on the part of an employee, a claim would be filed against a bond. If the claim is found to be legitimate, the insurance company would reimburse the insured business based on the terms of the bond and what was lost.

What parties are involved?

These can be categorized as either a first-party or third-party bond. First-party bonds protect businesses against any wrongdoings by its own employees. Such a bond involves the company itself any employees that work for it directly. Meanwhile, the third party type involves any third party who may work for them on a contract basis. This includes consultants that may be brought in for one project or any independent contractors who aren’t technically employees of the company. While first-party bonds need to be purchased by the company itself, a third party bond needs to be purchased by the contractors even though it is the business itself that is protected by the bond.

What are the types of fidelity bonds?

Even though a fidelity can all be categorized as either first-party or third-party, there are different types, within these categories. These different types include:

  • ERISA – ERISA is the Employee Retirement Income Security Act, which requires a business with a pension plan to purchase a fidelity that is equal to 10 percent of the plan’s total assets. For example, a pension plan that is worth $50,000 would require an ERISA bond that is worth $5,000. The maximum amount that can be purchased is $500,000. In any event, this bond protects a company should an employee embezzle retirement funds. Call us to learn about ERISA requirements.
  • Business service – A business service bond protects a company that requires employees to enter their clients’ homes such as home health care providers, pet sitters, and cleaning services. Should any kind of theft occur in a client’s home, the bond would payout to the business who would then be responsible for reimbursing the client for the theft.
  • Dishonesty – When someone asks about fidelity bonds, this is usually the kind of bond that is mentioned. The dishonesty type covers businesses who are victims of embezzlement, theft or any kind of wrongdoing on the part of an employee from within the business. Dishonesty bonds can be either blanket coverage or scheduled coverage. Blanket coverage covers all employees within a company unless they are specifically excluded by request. Scheduled coverage covers only certain employees who can be covered for different amounts based on the risks they pose. Blanket coverage is ideal for large companies with large turnovers, while scheduled coverage is great for smaller companies that have certain employees who handle several important responsibilities.

What are the requirements for a fidelity bond?

Businesses can apply for a bond whenever it hires a fiduciary or a high-risk employee. Some states require businesses to purchase them, so businesses are encouraged to find out what is required for their state. In any case, having a bond for any business makes perfect sense. Larger businesses can benefit greatly from a dishonesty bond with blanket coverage, especially if there is a lot of employee turnover, and any company that requires its employees to enter the homes of clients should have a business service bond in place to protect themselves and as a show of good faith towards clients. Having a service bond in place acts as a guarantee that a company’s employees can be trusted in a client’s home, and that the clients themselves will be safe.

When you apply for fidelity and are approved, you will need to actually purchase it. The price will depend on the nature of your business and how much of a risk your employees might be, but most bonds are relatively inexpensive compared to other forms of insurance. For example, a company that wants $100,000 worth of coverage should be able to secure a fidelity for $300 to $400 a year. With that kind of price, having one in place is well worth the cost. We at NFP can help you choose the right one for your business at an affordable price.

Fidelity bond requirements vary from state to state. Many are not required but rather suggested. If you are uncertain whether or not you have adequate fidelity bond coverage, reach out to us. Bonding is what we do, and teaching our clients about requirements and fidelity bond coverage is what we love to do. We can help you with all your needs and are here to serve you.