What Is a Fidelity Bond?

A fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees’ fraudulent or dishonest actions. Also known as an honesty bond, this form of insurance can protect against monetary or physical losses.

Understanding Fidelity Bonds

Fidelity bonds cover firms for such damages. Although they are called bonds, fidelity bonds are actually a form of insurance policy. They are typically designated as either first-party or third-party:

• First-party fidelity bonds are policies protecting businesses from wrongful acts committed by employees.
• Third-party fidelity bonds protect companies from similar acts by individuals employed on a contract basis.
  

Fidelity bonds are most often held by insurance companies, banks, and brokerage firms, which are specifically required to carry protection proportional to their net capital. Among the possible forms of loss that a fidelity bond covers include fraudulent trading, theft, and forgery.

Why Fidelity Bonds Are Used

Fidelity bonds can be considered part of a business’s approach to enterprise risk management. These insurance policies function as a sort of protection should the company suffer losses caused by fraudulent or criminal employee actions taken against the company or its clientele.

This can include cash thefts from the business as well as if the employee steals from a customer of the company. Acts of forgery by an employee that affect the business may also be covered by this type of policy. Robbery and burglary of the company safe, destruction of company property, and the illicit transfer of funds are covered by fidelity bonds, too.

Types of Fidelity Bonds

• Business services bonds: These products, also called business bonds or janitorial service bonds, are generally the most common type of fidelity bond. Their job is to protect clients when employees visit their premises. For example, should a company send an employee to a customer’s home and that staff member steals a computer, the bond would reimburse the client for the loss.
• Employee dishonesty bonds: These bonds protect companies and their clients in the event that an employee misuses Social Security numbers, credit card numbers, or other financial or personal data.
• ERISA bonds: The Employee Retirement Income Security Act (ERISA) of 1974 demands that trustees of pension plans have fidelity bond coverage equal to at least 10% of the total plan’s assets. This rule was put in place to protect plan beneficiaries from theft or other inappropriate actions orchestrated by those responsible for managing 401(k)s and other pension plans.
  

The Bottom Line

Fidelity bonds are something that many businesses need, either out of choice or because their state or municipality demands it. Sadly, not everybody is honest, and it’s often worth paying the premium for peace of mind and to reassure customers.