What is a Fidelity Bond? A Complete Guide

Jan 19, 2024 By Triston Martin

A fidelity bond is a form of business insurance designed to protect an employer against losses resulting from an employee's dishonest or fraudulent actions. This insurance can cover both financial losses and property damage caused by such actions. Unlike tradable securities, fidelity bonds are a type of insurance policy. They are considered a risk management tool for businesses, providing protection against losses incurred when an employee or customer engages in behavior that intentionally harms the business. Fidelity bonds cover various forms of misconduct that result in unfair financial gain for an employee or cause intentional harm to the company.

Learning Fidelity Bonds

If an employee or employees at a company commit fraud, the company could face legal or financial consequences in addition to the employee or employees who did it. Companies, especially ones with many workers, may have to pay these kinds of fines. Fraud bonds are insurance policies for businesses that cover these types of losses. Most of the time, fidelity bonds are held by banks, brokerage firms, and insurance companies. This is because they have to have the same amount of protection as their net capital. A fidelity bond can cover losses caused by, among other things, forgery, theft, and fraud.

Even though they are called "bonds," fidelity bonds are a type of insurance. They are called "third-party" or "first-party" fidelity bonds most of the time. First-party fidelity bonds are indeed insurance strategies that protect businesses from wrongdoing by workers. 3rd party fidelity bonds defend businesses from wrongdoing by contract workers. So, even though it's called a "fidelity bond," it's just an insurance policy. Since it's just an insurance policy, it can't be sold or earn interest like a normal bond.

How to Use Fidelity Bonds

Most businesses use loyalty bonds to deal with risks. A company can protect itself from loss by getting a fidelity bond. They protect companies from dishonest employees or employees who try to hurt the company on purpose. They also keep the company safe from customers who might try to lie to get its products or services. Another way that clients are kept safe is through trust bonds. A fidelity bond can help pay for damage done by an employee that costs a client money.

Most of the time, fidelity bonds cover forgery, fraud, or theft. The bond will pay for the damage, even if the employee (or client) can do the act. They keep the company's bottom line stable and from going into debt or, even worse, going out of business.

Different Kinds of Fidelity Bonds

Certain types of fidelity bonds, often referred to as loyalty bonds, provide coverage for situations where employees engage in fraudulent or criminal activities, despite initially appearing trustworthy. For example, if a window repairman steals jewelry while on a job at a storm-damaged home, or if a dog sitter steals money or a home health care provider steals belongings from a client, a loyalty bond can protect the company against liability for the employee's actions.

Companies may be required to purchase loyalty bonds, especially if employees have access to the company's retirement asset program. These bonds, mandated by the Employee Retirement Income Security Act (ERISA), protect the retirement assets from fraud or dishonesty. Generally, all individuals with access to the retirement assets are covered by these ERISA fidelity bonds, with coverage typically extending up to 10% of the value of the funds held in the retirement plan.

Coverage Expansion

There is a way to add more coverage to a good faith bond. The company and its assets will be even safer because of the new rules. The most common extension protects the business from:

  • Burglary
  • Arson
  • Simple and major theft
  • Forgery
  • Fraud

The above things can be done by employees, but coverage is usually extended so that they can be done by others.

When did Do Smaller Companies need To Get Fidelity Bonds?

A fidelity bond, which is a type of surety bond, could help any business with employees who deal with sensitive financial or personal information. When a dishonest worker does something that costs the company money, the bond pays for it. Most of the time, fidelity bonds are not required by law. But if you work as a freelancer for a bank or another financial institution, your clients may ask for fidelity bonds to protect their assets from your employees.

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