What Is a Fidelity Bond and How Does It Work?

A fidelity bond protects businesses from financial losses due to employee dishonesty. While called a “bond,” it functions as a form of insurance, reimbursing employers for losses of money, securities, or other property caused by employee theft, fraud, or embezzlement. It is a proactive risk management tool to mitigate internal threats.

Understanding Fidelity Bonds

A fidelity bond protects a business from direct financial losses arising from employee misconduct. These losses stem from dishonest acts such as theft of money, securities, or other property. For instance, if an employee embezzles funds or commits forgery, a fidelity bond can provide reimbursement. This coverage extends to various forms of dishonesty, including larceny and misappropriation.

Many organizations require fidelity bonds due to their operations or regulatory mandates. Businesses handling significant cash, client funds, or valuable inventory often seek this protection. Non-profit organizations and financial institutions also frequently use these bonds to protect against internal fraud.

The Employee Retirement Income Security Act (ERISA) mandates that individuals handling funds or property of employee benefit plans, such as 401(k)s, must be bonded. This protects plan assets from fraud. The bond amount required under ERISA is at least 10% of the plan assets handled, with a minimum of $1,000 and a maximum of $500,000, and can increase to $1,000,000 for plans holding employer securities.

Fidelity bonds differ from other common business insurance policies, as their scope is specifically narrowed to employee dishonesty. General liability insurance protects against third-party claims, and property insurance covers physical assets. Unlike these broader coverages, a fidelity bond addresses only direct financial losses incurred by the business due to intentional dishonest acts of its employees.

Different Forms of Coverage

Fidelity bonds are structured to cover employees in various ways, catering to different organizational needs. One common structure is an “Individual Bond,” which covers a single, specifically named employee. This approach is suitable when a business identifies a particular role or individual with unique access to assets that warrants dedicated protection. The coverage limit is set for that specific person.

A “Schedule Bond” covers multiple named employees or specific positions within an organization. For example, it might list all employees in a treasury department or cover all individuals holding “cashier” positions. This extends coverage to a group sharing similar responsibilities and risks.

The broadest form is a “Blanket Bond,” covering all employees within an organization, often with limited exceptions. This bond is preferred by larger companies or those with high employee turnover, as it automatically extends coverage to new hires. It provides comprehensive protection against employee dishonesty across the entire workforce.

Securing a Fidelity Bond

Securing a fidelity bond involves providing specific information to underwriters to assess risk. Businesses typically provide basic organizational details, including legal name, address, and the nature of their business operations. The industry in which the business operates is also pertinent, as certain sectors may carry higher inherent risks.

Underwriters also require information about the organization’s structure and total employees. Details on roles and responsibilities of employees handling money or valuable assets are important. This helps understand exposure to potential dishonesty.

The application requires detailing internal controls and accounting procedures, such as segregation of duties and internal audits. Information on past loss history related to employee dishonesty is also requested. Finally, the organization must specify the desired coverage amount.

Organizations apply for a fidelity bond through an insurance broker specializing in surety bonds or directly with a surety company. These entities provide application forms, often available online. Completing the form involves accurately inputting collected data, ensuring details align with business operations.

The Claim Process

Initiating a fidelity bond claim begins upon discovering a financial loss due to employee dishonesty. The first step involves securing evidence and conducting an internal investigation to understand the loss scope. This may also involve contacting law enforcement.

Prompt notification to the insurer is crucial, as policies stipulate timeframes for reporting a loss. Failing to adhere can jeopardize coverage. Required documentation often includes police reports, internal audit findings, and financial statements substantiating the loss. Evidence proving the employee’s dishonest act is also essential.

Once filed, the surety company investigates to verify facts and assess claim validity. This may involve reviewing documentation, conducting interviews, and engaging experts to quantify the loss. The investigation timeline varies, but the company aims to determine if the incident falls within coverage terms.

Claim outcomes include payment of the covered loss, up to the bond’s limit, if investigation confirms employee dishonesty and policy adherence. A claim may be denied if the loss is not covered, policy conditions were not met, or evidence is insufficient. The surety company provides reasons for denial.