Fidelity Bond

Fidelity bonds protect a business from any wrongdoing on the part of an employee. They are often used to cover things such as theft and property damage, but there are different types of fidelity bonds that also cover things such as embezzlement and fraud from higher-ranking employees within a major company.

Even though they are referred to as "bonds," they are different from surety bonds. While a surety is purchased by a business to protect its clients, a fidelity bond protects the business itself. They protect businesses from a loss of company monies or property from employees who intend to cause the company to sustain a loss and obtain an improper financial benefit for themselves or another party.

The bonds cover many of the same things that are covered by basic crime insurance policies, such as burglary and theft, but they also cover things that these policies might not. This includes things such as fraud, forgery, embezzlement, and many other "white collar" crimes that can be committed by employees in financial institutions and large companies.

Fidelity can be a blanket bond that covers all of the employees within a company, or it can be for one employee on an individual basis. An insurance company can also set certain guidelines for a business based on its hiring practices, and the protections provided by a bond will only remain in place as long as the duties of the covered employees remain the same. In other words, an employee who is covered by a fidelity may not be covered should that employee accept a different position within the same company.

Should a company sustain a loss due to some kind of wrongdoing on the part of an employee, a claim would be filed against a bond. If the claim is found to be legitimate, the insurance company would reimburse the insured business based on the terms of the bond and what was lost.

Fidelity bonds can be categorized as either a first-party or third-party bond. First-party bonds protect businesses against any wrongdoing by their own employees. Such a bond involves the company itself and any employees who work for it directly. Meanwhile, the third-party type involves any third party who may work for them on a contract basis. This includes consultants that may be brought in for one project or any independent contractors who aren't technically employees of the company. While first-party bonds need to be purchased by the company itself, a third-party bond needs to be purchased by the contractors, even though it is the business itself that is protected by the bond.

Even though a fidelity can all be categorized as either first-party or third-party, there are different types within these categories. These different types include:

ERISA

ERISA is the Employee Retirement Income Security Act, which requires a business with a pension plan to purchase a fidelity bond equal to 10% of the plan's total assets. For example, a pension plan that is worth $50,000 would require an ERISA bond that is worth $5,000. The maximum amount that can be purchased is $500,000. In any event, this bond protects a company should an employee embezzle retirement funds.

Business Service

A business service bond protects a company that requires employees to enter their clients' homes, such as home health care providers, pet sitters, and cleaning services. Should any kind of theft occur in a client's home, the bond would payout to the business, which would then be responsible for reimbursing the client for the theft.

Dishonesty

When someone asks about fidelity bonds, this is usually the kind of bond that is mentioned. The dishonesty type covers businesses that are victims of embezzlement, theft, or any kind of wrongdoing on the part of an employee from within the business. Dishonesty bonds can be either blanket coverage or scheduled coverage. Blanket coverage covers all employees within a company unless they are specifically excluded by request. Scheduled coverage covers only certain employees who can be covered for different amounts based on the risks they pose. Blanket coverage is ideal for large companies with large turnovers, while scheduled coverage is great for smaller companies that have certain employees who handle several important responsibilities.