What Is a Dishonesty Bond and What Does It Cover?

A dishonesty bond protects businesses from financial losses due to fraudulent or dishonest acts by employees. It functions as a form of insurance, providing security against internal threats. Businesses implement this protection as part of a comprehensive risk management strategy.

Defining Dishonesty Bonds

A dishonesty bond is an insurance policy protecting an employer from financial losses caused by employee dishonesty. It is also known as a fidelity bond or employee dishonesty bond. The bond’s primary purpose is to reimburse the employer for monetary or property losses resulting from employee misconduct. It establishes a three-party relationship: the employer (insured), the employee, and the surety company that issues the bond.

Unlike traditional surety bonds, a dishonesty bond operates more like an insurance policy where the insurer pays claims directly to the employer. The employer purchases the bond from a surety company and pays a premium for this coverage. In the event of a covered loss, the employer files a claim with the surety company to seek reimbursement.

Acts Covered by Dishonesty Bonds

Dishonesty bonds cover specific types of employee misconduct that result in direct financial loss to the business. This includes criminal acts such as theft of money, securities, or other valuable property. Covered acts often encompass embezzlement, which is the fraudulent appropriation of funds or property entrusted to one’s care. Forgery and fraud committed by employees are also commonly included.

Coverage generally extends to direct financial losses sustained by the employer due to these dishonest acts. This can involve unauthorized wire transfers, larceny, or any other intentional wrongdoing intended to cause the company a loss and provide an improper financial benefit. The bond usually focuses on direct financial impacts and may not cover indirect losses like business interruption or accounting errors.

Who Needs a Dishonesty Bond

Many businesses obtain dishonesty bonds to protect their assets. Companies handling significant amounts of cash, valuable inventory, or sensitive financial information find these bonds beneficial. This includes financial institutions, retail businesses, healthcare providers, and any organization where employees have access to funds or valuable digital assets.

While not always legally mandated, a dishonesty bond is a prudent risk management tool, especially for businesses with employees in positions of financial trust. Some contracts, with government entities or licensed professional services, may require a business to carry a dishonesty bond. Even if not legally required, a bond enhances confidence among customers and partners, demonstrating a commitment to financial security.

Steps to Obtain and Manage a Bond

Obtaining a dishonesty bond involves assessing the business’s specific needs for coverage. Businesses determine the desired coverage limits and identify the types of employees or positions to be covered. The next step is contacting a surety provider or an insurance agent specializing in such bonds. These providers offer quotes and guide the business through the application.

The application requires information about the business’s financials, operations, and sometimes details about the employees to be covered. Premiums for dishonesty bonds are based on the coverage amount, number of employees, and theft prevention controls. Once approved, the bond is issued for a specified term, typically one year, and requires renewal. If a covered loss occurs, the employer must report the incident to the surety company, requiring loss itemization and proof of legal action.