What Is a Fidelity Bond and Why You Might Need One
Uncover the purpose of a fidelity bond, a vital tool for protecting your business from financial losses due to employee misconduct.
A fidelity bond offers a layer of protection for businesses against financial losses resulting from dishonest actions carried out by its employees. This type of coverage helps mitigate the financial risks associated with internal misconduct, providing a means for recovery should such events occur. It serves as a financial safety net designed to address the potential impact of employee dishonesty on a business’s assets.
Understanding a Fidelity Bond
A fidelity bond is a specialized form of business insurance that protects an employer from financial losses due to dishonest acts committed by their employees. While often referred to as a “bond,” it functions much like an insurance policy, where the issuing company agrees to compensate the employer for covered losses.
Three parties are involved in a typical fidelity bond arrangement: the obligee, the principal, and the surety. The obligee is the employer or business that receives the protection against financial losses. The principal refers to the employee or employees whose actions are covered by the bond. The surety is the company that issues the bond and guarantees compensation to the obligee if a covered loss occurs due to the principal’s dishonest acts.
What a Fidelity Bond Covers
A fidelity bond covers specific types of financial losses arising from employee dishonesty. This coverage extends to direct financial losses of money, securities, or other property. The bond provides reimbursement for damages caused by intentional wrongful acts.
Common examples of covered acts include the theft of funds or inventory, embezzlement of company assets, and forgery of financial documents. Fraudulent alteration of records and misappropriation of funds also fall under this protection.
Who Typically Needs a Fidelity Bond
Various organizations often necessitate a fidelity bond due to regulatory requirements, industry standards, or risk management practices. Financial institutions, such as banks and credit unions, frequently require these bonds.
Employee benefit plans, particularly those covered by the Employee Retirement Income Security Act of 1974 (ERISA), are legally mandated to obtain fidelity bonds. ERISA requires that individuals who handle plan funds be bonded for at least 10% of the plan’s assets. Non-profit organizations managing significant funds and businesses where employees regularly handle cash, valuable inventory, or sensitive data also commonly secure fidelity bonds. Companies with remote employees or those with minimal direct supervision also find this protection beneficial.
Fidelity Bonds Compared to Other Protections
Fidelity bonds differ from other common insurance policies and bond types, each serving a distinct purpose in risk management. General liability insurance primarily covers third-party claims of bodily injury or property damage from accidents or negligence. It does not cover losses resulting from intentional dishonest acts by employees.
Property insurance protects against damage to physical assets caused by perils like fire, natural disasters, or external theft. This differs from a fidelity bond, which addresses internal theft and fraud committed by employees.
While a fidelity bond is a type of surety bond, their primary beneficiaries and purposes distinguish them. A fidelity bond protects an employer from losses caused by their employees’ dishonesty. Other surety bonds, such as contract bonds or license and permit bonds, typically guarantee the principal’s performance or compliance with regulations to a third party. If a claim is made on a fidelity bond, the employer is reimbursed without an obligation to repay the surety, unlike many other surety bonds where the principal repays the surety.