In this article, you’ll find an informative exploration of what a fidelity bond is, why businesses use them, and the type of stuff they provide coverage for.
Business insurance is vital for every company. This coverage provides businesses with protection from losses stemming from events that may occur during the average course of business. There are a wide variety of insurance types for businesses. Some of the more notable ones include coverage for property damage, legal liability, and risks in relation to employees. Companies decide on what their insurance needs are by basing them off of potential risks. Oftentimes, these can vary depending on what the type of environment the company typically operates in is.
It is especially important that owners of small businesses take into careful consideration – and evaluate – their business insurance needs. This is mostly because they may have more personal financial exposure in light of a significant loss.
A majority of commercial companies and organizations are unfortunately vulnerable to various attacks. Fraud, theft, embezzlement, all of these heinous acts are possible to inflict on companies that don’t have the proper protection. Crime occurring within the workplace is on a gradual rise and takes place even in the best of work environments. This escalation can be attributed to the use of computers and modern technology. Criminals are continuing to develop more successful methods to attack and threaten these companies and organizations and their security.
With that in mind, what happens if the malicious acts are carried out by an employer’s own employees?
This is where ‘fidelity bonds’ come into play and is what this article will be focusing on. It will explain what it is, why it’s useful, and the different types.
What is it?
A ‘fidelity bond’ is a form of business insurance. It offers employers protection against losses that occur due largely in part to their employees’ fraudulent or dishonest actions. This particular form of insurance can provide protection against losses of the monetary or physical variety. For many people, this form of insurance is a key component in the risk management strategy of a company.
At their core, fidelity bonds are a way to make sure policyholder companies have the best protection from wrongful acts. Ones that their employees commit. Moreover, it is important to remember that fidelity bonds are not tradable securities.
While “bonds” is in the name, that is not what they are. Bonds are a fixed income instrument that is representative of a loan that an investor makes to a borrower. The obligations of a fidelity bond to protect employers from employee-dishonesty means that they are actually insurance policies. These insurance policies provide security from losses of company monies and securities. Moreover, other property from employees who have a manifest intent to do one of two things or both:
- Cause the company to experience a loss
- Obtain an improper financial benefit, whether it be for themselves or a separate party
There are an array of other coverage extensions available by way of purchasing additional insurance agreements. These are quite common when it comes to most crime insurance policies. These include fire, burglary, fraud, general theft, computer theft, disappearance, and forgery, among others. Their basic design allows them to add further protection to specific company assets.
Criminal insurance policy
While on the topic of crime insurance policies, we should shed light on what they entail. These policies provide the proper coverage for companies and organizations. They operate as a way to prevent any losses that could happen from an array of criminal acts. There are three D’s in the policy and they refer to three causes of loss:
A conventional crime insurance policy relating to the three D’s only provides coverage under these types. However, there can be an addition of specialized coverage endorsements to enhance the policy. These include computer fraud, credit card forgery, and extortion. Generally speaking, this policy comes in a package along with a fidelity bond.
The overall purpose
Let’s imagine that a company has employees that are committing fraudulent acts. In this case, the company itself may be subject to legal or financial penalties. Furthermore, the individual employee or group of employees that are responsible for carrying out the act. The companies, as a result, are at risk of becoming exposed to such penalties. This is especially true for firms that have a large number of employees. Fidelity bonds are insurance policies that will provide coverage for firms to protect them from such damages.
More often than not, the holders of fidelity bonds are insurance companies, banks, and brokerage firms. All of which have a specific requirement to carry protection proportional to whatever their net capital is. Among the potential forms of loss that a fidelity bond covers include theft, fraudulent trading, and forgery.
The typical designation of fidelity bonds is either as a first-party or third-party. Fidelity bonds that are first-party are policies that protect businesses from wrongful acts at the hands of employees. Third-party fidelity bonds protect companies from similar acts. However, what’s different is these are acts by individuals that are employed on a contract basis. Therefore, despite its name, a fidelity bond is solely an insurance policy. And to reiterate an earlier point, it is not tradable. Moreover, it cannot accumulate interest like a regular bond.
It is not unusual for some to address it as an ‘honesty bond’. As a matter of fact, it goes by various names in various places. In Australia, it is ‘employee dishonesty insurance’. In the U.K., it is ‘fidelity guarantee insurance’.
Why businesses use them
One can easily consider fidelity bonds to be part of a business’s approach to company risk management. This type of insurance policy acts as a protection in case the company suffers losses. Particularly, losses whose causes are fraudulent or criminal employee actions working against the company or its clientele. This can typically include cash thefts from the business. In addition, it can include an instance of an employee stealing from a customer of the company.
Forgery at the hands of an employee that ultimately affects the business may get coverage from this type of policy. Other cases that fidelity bonds covers include the following:
- Robbery and burglary of the company safe
- Any type of destruction of company property
- Unlawful transferring of funds
There are numerous types of fidelity bonds. Specialized forms of these policies will often cover specific instances while performing services for customers. One of these instances is, of course, employees carrying out fraud or illicit activities. Let’s use a window repair worker as an example. Imagine they are sent to a home that was a recent victim of serious damage courtesy of a storm. From there, imagine that they steal jewelry from the residence. In this particular case, the company could potentially have exposure pertaining to their employee’s actions.
In a similar vein, imagine a dog sitter using their access to a client’s home as a way to steal money. Alternatively, what if a home health provider was taking clothes or an expensive device, like a laptop, from a client. A fidelity bond tailor-made for such circumstances may have the ability to provide the company with the proper coverage it needs.
There are some types of fidelity bonds that may be administered for businesses to acquire. The idea of protecting the company’s retirement plan assets can often require the employment of fidelity bonds. This is just in case an employee manages to gain access to and misappropriated assets put aside for retirement plans. Employee Retirement Income Security Act (ERISA) fidelity bonds usually incorporate bonding anyone who has access to the company’s retirement assets. The individuals might bond for roughly 10% of the value of the funds they are able to access in the retirement plan.
Blanket & Scheduled
Two notable types of fidelity bonds are ‘blanket’ and ‘scheduled.’
- Blanket Fidelity Bonds: These types of fidelity bonds provide coverage for all employees on the day of the bond’s issuance. That is unless they are specifically excluded. New employees receive automatic coverage and conversely, halt the protection when they are no longer working there. The bonding of the employees are all for the exact same aggregate amount. Moreover, the limit of liability only applies “per occurrence.” There are plenty of groups who should use blanket fidelity bonds. These include businesses that have a large number of employees and those with frequent employee turnover. Additionally, organizations with either voluntary honorary positions, not for profit associations.
- Scheduled Fidelity Bonds: These fidelity bonds provide coverage on employees whose names are under the bond. It is only applicable to a select number of employees and each employee can be bonded for varying amounts. The limit of liability applies per either the name or position scheduled. Businesses where employees have greater responsibilities and/or manage larger sums of money commonly use these bonds. Those who are usually under this bond include real estate managers, office managers, and bookkeepers.
What a fidelity bond doesn’t cover
It is important that you be knowledgeable about all the things fidelity bonds don’t cover. The following aspects in your business operation will not receive coverage:
- Mishaps like job injuries or work accidents
- Bail bonds or court bonds specifically for the legal system
- Individuals who are self-employed do not receive coverage if they steal from themselves