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Trust is essential in business. However, a business owner should prepare for a situation where an employee might break that trust.  All employers should consider fidelity bonds for an extra layer of protection in the event they experience a loss due to the unscrupulous or dishonest actions of an employee. A recent study by the Better Business Bureau revealed that 40 percent of employees have stolen from their employer, a data point that underscores the importance of fidelity bonds.

Keep reading to learn more about how fidelity bonds work,  kinds of fidelity bonds  available, the benefits they offer employers and how to apply for fidelity coverage.

How does a fidelity bond work?

A fidelity bond is a kind of honest insurance that protects employers from losses that result from dishonest actions of employees, such as theft of cash or inventory. If an employee commits a dishonest act covered under the terms of the fidelity bond, a business can file a claim with the surety for reimbursement.

Fidelity bonds can be customized to cover specific roles or individual employees, or they can cover a company’s entire workforce with a blanket bond. Depending on a business’s needs, the terms of a fidelity bonds can be tailored to cover losses up to a certain dollar amount.

Categories of fidelity bonds

There are two main categories of fidelity bonds.

  • First-party fidelity bonds, provide a business with traditional fidelity coverage protecting businesses from the dishonest actions of their employees. An example might be a receptionist at a dentist office who pockets cash receipts.
  • Third-party fidelity bonds, also known as Business Services bonds, protect businesses who utilize the bonded business’s services. For example, a janitorial worker steals from an electronics store that contracted for the cleaning company’s services. 

Why are fidelity bonds critical for risk management?

Businesses use fidelity bonds to help reduce their exposure to risk and financial loss. Fidelity bonds protect businesses in the event an employee commits an act of forgery, property theft, embezzlement, illegal transfer of funds, misappropriation or other dishonest acts.

Does your business need a fidelity bond?

Fidelity bonds offer protection for a wide range of business needs. A business may need a fidelity bond in the following scenarios:

  • If a business operates in the service sector and places employees inside other businesses or residences.
  • If employees regularly handle cash or other valuable items.
  • If employees provide consulting services that allow access to propriety information or valuable assets.

Sometimes fidelity bonds may be required for certain businesses, so it’s important to work with an experienced surety professional to ensure you are satisfying all bonding mandates.

Types of fidelity bonds

There are three main types of fidelity bonds.

Business service bonds

Business service bonds protect businesses whose employees work at the customer’s location, such as pet and house sitters, janitorial services or contractors.

Standard employee dishonesty bonds

Standard employee dishonestly bonds protect businesses from losses stemming from the dishonest actions of employees, such as theft. This kind of fidelity bond is appropriate for professional offices and non-profit organizations.

ERISA bond

ERISA bonds are required for fiduciaries that handle pension and employee benefits plans, per the Employee Retirement Income Security Act of 1974. ERISA bonds must cover at least 10% of the plan’s total assets, and they provide protection from dishonest acts of the fiduciary.

How to get a fidelity bond

Fidelity bonds can be purchased from insurance agents and other distribution partners of surety companies who are the ultimate provide of the coverage. Covered loss, bond limits and rates will vary by carrier, so it’s important to work with an experienced agent who can assist you in getting the right fidelity bonds for your business’s specific needs.

Explore fidelity bond offerings to protect your business

Surety bonds play an important role in a business’s risk management strategy. As a responsible business professional, determining the right fidelity bonds and carrier for your unique circumstances can add peace of mind and financial protection in the event of dishonest or fraudulent employee event.

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The information included here is designed for informational purposes only. Nationwide does not guarantee the accuracy or timeliness of the information contained herein. It is not legal, tax, financial or any other sort of advice, nor is it a substitute for such advice. The information may not apply to the reader’s specific situation. It is the reader’s responsibility to comply with any applicable local, state or federal regulations. Nationwide Mutual Insurance Company, its affiliates and their employees make no warranties about the information nor guarantee of results, and they assume no liability in connection with the information provided.