What Are Fidelity Bonds?

What are fidelity bonds?  

All businesses have an obligation to protect their customers, but they also need to protect themselves. That’s why it is imperative to have the appropriate insurance in place. One critical coverage need of many high-profile business owners is a fidelity bond. Along with other commercial insurance, it is a foundation stone to help you create a strong risk management program.   

Unlike many other types of bonds, fidelity bonds are insurance coverage. They exist to protect both the business and its clientele against dishonest acts. Therefore, should someone cause a significant loss to your business, the fidelity bond will enable you to recover from the event.  

The Purpose of Fidelity Bonds  

Businesses need significant property & liability insurance to protect them against the ramifications of unexpected hazards that might occur at any time. One risk that you might not realize exists comes from your employees.   

As much as you strive to hire ethical, honest employees, there is a chance that one of them might not be as trustworthy as they seem. In a worst-case scenario, employees might steal from the company or from customers. That could mean a huge breach in trust, damage to your reputation and a significant financial loss.  

To help you control the damage and receive financial assistance in your recovery, a fidelity bond might be the solution. This bond agrees to compensate you and affected clients against the losses caused by employee dishonesty or theft. Therefore, you won’t suffer undue financial losses just because of someone else’s misconduct.  

Unlike most surety bonds, a fidelity bond is an insurance policy. It will compensate the business for losses it sustains in these accidents. Other surety bonds, however, only function as guarantees that the business will perform the services it’s obligated to do for its clients, or else it will compensate them. The ability to recover your own financial losses by filing a claim is the key difference between fidelity and other bonds.  

Still, fidelity bonds do provide security that helps clients know that you have their back in case of problems. Dishonest acts can easily affect customers, and you will likely have to pick up the pieces. The fidelity bond is the guarantee to your clients that you will be able to do so.  

Plus, your fidelity bond doesn’t just protect you from employee dishonesty. It can also help the business recover its losses in case a client steals from the company. Therefore, it is a multi-faceted bond that will help you in numerous situations.  

What are the types of fidelity bonds?  

Fidelity bonds come in different shapes and sizes. These options can greatly help businesses adapt their coverage to their specific needs. The two primary types of fidelity bonds are:  

• First-Party Bonds 

A first-party bond is the most common type of fidelity bond. It compensates the business and others in case a dishonest act, monetary theft or other crime causes them a financial loss.

• Third-Party Bonds  

This type of bond applies when you use subcontractors who work within your business. Even though these parties might carry their own insurance, they are still representatives of your business. Therefore, you’ll need to have this bond in case they commit dishonest actions.  

Are there other types of bonds?  

There are many ways that you can tailor fidelity bonds to address your different industry needs. Some of the unique types of fidelity bonds include: 

• Business Services Bonds  

If you dispatch an employee to a client’s business or property, then that person might steal from the client. As a result, you might have to compensate the client for their losses. This bond will enable you to do so. 

• Standard Employee Dishonesty Bonds  

This type of bond applies to the business’s losses that result from employee dishonesty. So, if an employee were to steal from you, then the fidelity bond will help you recoup your losses.

• ERISA Bonds  

 These bonds are specifically required of certain businesses under the Employee Retirement Income Security Act of 1974. Under this law, pension plan trustees must carry bonds that are worth at least 10% of the account’s total value. So, if a dishonest actor steals from the pension plan, the assets within that plan will still have protection. The plan’s participants will be able to receive their pensions as promised.   

Additionally, you can expand your bonds to cover a variety of dishonest actions besides theft of cash. Policy extensions can cover acts of forgery, arson, fraud and acts of burglary.  

Why do I need fidelity bonds?  

The reason you must buy a fidelity bond is because you must have a proper risk management plan. After all, you never know when someone might commit a criminal act against the business. The presence of a fidelity bond makes sure that the business and affected customers will be able to recover their losses.  

Keep in mind, this coverage does not diminish your need for other property & liability insurance. Therefore, it’s imperative to combine your fidelity bond in as effective a way as possible with your other insurance benefits. Your independent insurance agent is happy to help you do so.