What Does a Fidelity Bond Actually Cover?
Understand the precise scope of fidelity bond coverage, protecting businesses from specific employee dishonesty while clarifying its limitations.
A fidelity bond shields businesses from financial losses stemming from the dishonest actions of their employees. It offers reimbursement for monetary or physical losses incurred due to employee misconduct, acting as a safeguard against internal threats. This type of bond is a component of a company’s risk management strategy.
Understanding Covered Perils
A fidelity bond primarily covers direct financial losses resulting from specific dishonest acts committed by employees. These acts generally involve an intent to cause loss to the employer or to gain improper financial benefit for the employee or a third party.
Theft of money and securities is a core covered peril, encompassing the direct taking of cash, checks, or negotiable instruments by an employee. Forgery and alteration are also typically covered, addressing losses from forged financial documents, checks, or unauthorized modifications to payment instructions.
Embezzlement, which involves the fraudulent appropriation of assets entrusted to an employee, includes instances where an employee diverts company funds or client payments into personal accounts. Broader fraudulent acts are also included, covering various forms of deception that directly lead to financial loss for the employer. Computer fraud, specifically unauthorized access or manipulation of computer systems causing financial loss, can also be covered.
Parties Protected by a Fidelity Bond
The primary beneficiary of a fidelity bond is the employer or the business entity that purchases the bond. It protects the organization from financial damages caused by the dishonest acts of its own employees, functioning as a direct reimbursement mechanism.
In certain circumstances, a fidelity bond’s protection can extend to clients or third parties. This is relevant for businesses whose employees handle clients’ property or funds, such as service providers who work on client premises. For instance, if an employee of a service business steals from a client’s home, the bond may reimburse the client for the loss.
Common Types of Fidelity Bonds
Fidelity bond coverage varies depending on the bond type and its intended purpose. Commercial Crime Policies often include employee dishonesty coverage, which protects against employee theft of money, securities, and other property.
The Employee Retirement Income Security Act (ERISA) Fidelity Bond is mandated by federal law for employee benefit plans. This bond protects plan assets from losses due to fraudulent or dishonest acts by fiduciaries and others who handle plan funds. ERISA bonds must cover at least 10% of the plan’s assets, generally up to a maximum of $500,000, which can increase to $1,000,000 for plans holding employer securities.
A Business Service Bond is designed for companies that perform services on clients’ premises, such as cleaning or home repair. This bond protects the client from theft or damage caused by the service provider’s employees while performing their duties. Financial Institution Bonds, often called Banker’s Blanket Bonds, are tailored for banks, credit unions, and other financial entities. These comprehensive bonds cover a wide array of risks, including employee dishonesty, forgery, and computer fraud specific to the financial industry.
What Fidelity Bonds Do Not Cover
Fidelity bonds have specific limitations and exclusions. They do not cover losses resulting from simple errors, negligence, poor business judgments, or accidental damage, as coverage is limited to intentional dishonest acts.
Acts committed by owners, partners, or certain high-level executives are often excluded from standard fidelity bond coverage unless specifically added via an endorsement. This is because the bond primarily targets employee dishonesty rather than acts by those with ownership stakes.
Fidelity bonds do not cover indirect or consequential losses, such as business interruption, loss of market share, or reputational damage. Coverage is restricted to direct financial losses. Losses caused by external parties, such as shoplifting, external cyber-attacks, or customer fraud, are generally not covered unless the policy is a broader commercial crime policy.
Acts committed by an employee before the bond was in force, if known to the employer, or acts discovered after the bond expired without proper notification, are excluded. Fidelity bonds are distinct from other insurance coverages like general liability or property insurance.