What Type of Insurance Is Fidelity Insurance?

Fidelity insurance is a specialized form of business insurance designed to protect organizations from financial losses stemming from internal threats. This coverage provides protection against the dishonest acts of employees, which can lead to significant financial harm. Its fundamental purpose is to mitigate risks associated with employee misconduct, offering a crucial layer of financial security for businesses handling various assets.

Understanding Fidelity Insurance

Fidelity insurance protects employers from financial losses resulting from dishonest acts committed by their employees. It is often referred to as a “fidelity bond” or “employee dishonesty insurance.” This coverage is a vital component of a business’s risk management strategy, addressing the potential for internal fraud.

The primary objective of fidelity insurance is to reimburse the insured organization for direct financial losses caused by an employee’s fraudulent or dishonest actions. These acts typically encompass deliberate behaviors intended for personal financial gain, such as theft of money, securities, or other physical property. The coverage specifically targets losses directly caused by an employee, distinguishing it from other insurance types that cover external threats or accidental losses.

What Fidelity Insurance Covers

Fidelity insurance policies cover financial losses directly caused by an employee’s dishonest acts. Covered perils commonly include the theft of money, securities, or other valuable property, including physical currency, checks, or electronic funds.

Policies also cover losses from forgery or alteration of documents, such as checks or invoices. Fraudulent financial transactions, embezzlement, and misuse of employment capacity for personal gain are also covered. Coverage often extends to computer fraud and funds transfer fraud committed by employees. It is important to note that fidelity insurance covers direct financial losses, not indirect or consequential losses like loss of income during an investigation or damage to reputation.

Key Features and Policy Types

Fidelity insurance policies have distinct features and can be structured in several ways. One common distinction is between “blanket” policies and “schedule” or “named position” policies. Blanket policies provide coverage for all employees within an organization without individually naming them.

Conversely, schedule coverage can be either “named schedule” or “position schedule.” Named schedule policies cover specific individuals, while position schedule bonds cover specific job positions. These types are often suitable for smaller businesses or those with high-risk roles. Policies also define coverage limits and deductibles. The policy period defines the timeframe for the dishonest act, and a “discovery period” specifies the time after policy expiration when a loss can still be reported.

Who Needs Fidelity Insurance

Many organizations obtain fidelity insurance to protect their assets. Any business with employees handling money, valuable inventory, or sensitive financial information can benefit from this coverage. This includes businesses of all sizes, as employee dishonesty can financially devastate even small companies.

Financial institutions, such as banks and brokerage firms, are often required to carry fidelity bond coverage. Non-profit organizations, retail businesses, and companies with significant cash flow or valuable goods also find this insurance relevant. The Employee Retirement Income Security Act (ERISA) mandates fidelity bond coverage for individuals handling assets in employee benefit plans, including 401(k) plans, to protect participants from fraud or dishonesty.