Fidelity bond

A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.

While called bonds, these obligations protect an employer from employee dishonesty losses are similar to insurance policies. They protect against losses of company monies, securities, and other property due to the actions of employees who have a manifest intent to cause the company loss. Fidelity coverage is often offered in combination with other forms of crime-insurance policies, such as burglary, robbery computer theft, mysterious disappearance, fraud and forgery, all with the purpose of the protection of company assets.

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First-Party Vs. Third-Party Fidelity Bonds

There are two types of fidelity bonds: first-party and third-party. First-party fidelity bonds protect businesses against intentionally dishonest acts committed by employees of that business. Third-party fidelity bonds protect businesses against intentionally wrongful acts committed by people working for them on a contract basis (e.g., consultants or independent contractors).

In third party situations the business working as the consultant or contractor carries the coverage for the benefit of the client business.

Types of Fidelity Bond Coverage

• ERISA bonds: If you have a pension plan, the Employee Retirement Income Security Act requires a fidelity bond in a minimum amount of 10% of total plan assets up to a maximum bond of $500,000.. For example, total plan assets of $100,000 would require a bond of at least $10,000. This type of fidelity bond carries no deductible and is written in the name of the plan. Actions of “Fiduciaries”, as defined in the Act, are covered while they are handling pension funds.
• Business service bonds: Businesses whose employees enter the premises of clients and customers obtain these bonds to cover employee theft of client property.
• Dishonesty bonds: Classic Fidelity Bonding. Two types:
  • Blanket coverage: Written in the name of the business with all employees covered. Can be endorsed with higher coverage on positions with greater exposure and can specifically exclude other positions. Good option for large companies and those with high rates of employee turnover.
  • Scheduled coverage: Employee name or position is listed with specific amount of coverage on each. Used when organization is small and exposure is limited.

The Difference Between Surety and Fidelity Bonds

Surety and Fidelity bonds are often grouped together but their uses differ greatly. Fidelity bonds guarantee the honesty of employees but are written in the name of the protected entity, the employer. Although they appear to be a two party agreement, in reality the employee is the principal and the employer is the obligee, so along with the bonding company there are three. If the bonding company pays a loss due to dishonesty, the offending employee will be liable for reimbursement. Surety bonds directly and distinctly name the three parties and can be written to cover any agreement. Again, if the principal defaults the surety pays the obligee and then seeks reimbursement from the principal.

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