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.