What a Fidelity Bond Is All About:
Fidelity Bonds are a very common insurance product for businesses. Designed to insure against fraudulent acts committed by employees, Fidelity Bonds not only protect a business against certain employee activities but also protect customers who may be on the receiving end of those fraudulent acts.
Fidelity Bonds are one of the oldest forms of insurance. They are also a commonly required purchase for certain businesses that desire to open up shop in some states. Many state legislatures have made it impossible to get a business license within that state unless a Fidelity Bond is purchased before submitting an application.
Not to be confused with Errors and Omissions Insurance, Fidelity Bonds specifically targets deceitful acts, not mistakes or oversights. The distinction can sometimes be subtle, but can make all the difference when a claim is filed.
Read on to understand if this type of insurance is right for your business.
What Is a Fidelity Bond?
At a basic level, Fidelity Bonds are insurance products centered around fraud. All Fidelity Bonds exist to protect you and your customers. Available in different amounts, Fidelity Bonds are designed for two reasons. First, they will be used to reimburse your customers in case one of your employees, or someone you hire out as an independent contractor, conducts themselves deceitfully. Secondly, you can file a claim and seek reimbursement should your business suffer monetary or other asset losses as a result of employee misdeeds.
Monetary theft is the reason why companies purchase Fidelity Bonds and the primary reason they exist. While these bonds carry a dollar value (e.g., some bonds may be worth $500,000), they can cover the value of all assets. While they will insure against theft such as embezzlement, they will also insure against fraudulent acts that lead to the loss of valuable, insured property.
A Fidelity Bond is not put in place as an investment tool for your business. Although the name of this insurance product uses the word "bond," it cannot generate interest, nor can it be traded for its value. It is an insurance product, commonly designed on a "claims made" basis. Depending on the amount of insurance purchased, successful claims will cover the full cost of the losses, up to the limit of the purchased insurance.
Do I Need a Fidelity Bond?
This insurance may come in handy if:
- Your company is required to purchase this insurance to get a business license
- Your business has employees who handle financial transactions
- Your business collects personal information from customers
- You operate a business within the financial sector
Still not sure what you need?
CoverWallet's Insurance Checklist , you'll find a list of insurance types needed for your specific business or industry.
What Do Fidelity Bonds Cover?
At a High Level...
Fidelity Bonds cover monetary and asset losses due to fraudulent employee actions. These losses can occur as a result of employees who commit:
- Forgery
- Money or product counterfeiting
- Embezzlement
- Securities fraud
- Identity theft
- Computer hacking
- Many other forms of theft
Getting Into the Details…
Fidelity Bonds can be purchased as both "first-party" and "third-party" coverages. First-party coverage will cover your business when losses occur due to employee theft. Third-party coverage will cover your customers or clients when liability claims arise. Depending on your type of business, purchasing a Fidelity Bond with language for either first or third-party coverage is important.
While this insurance will often cover all employees, businesses can minimize both the scope and the cost of this insurance by designing it to cover one or a few employees.
This type of insurance can cover instances such as:
| Type of Claim | Description | Example |
|---|---|---|
| Embezzlement | Coverage for when losses occur due to employee theft from the company. | If an employee embezzles money, a Fidelity Bond will cover the amount lost, up to the amount of coverage purchased. |
| Theft from customers or clients | Coverage for liability claims when employees steal from others. | If an employee steals money or valuables that they would otherwise have had no access to, a Fidelity Bond can reimburse the client. |
| Identify theft | Coverage for instances where employees steal the identity of others. | Whether the identity was stolen is from another employee or a customer or client, a Fidelity Bond can cover the losses. This occurs when the employee would not have had access to the private information outside of the job. |
| Asset theft | Covers businesses that suffer a loss when employees steal valuable assets from the company. | If an employee is stealing products from the business, or charging themselves less money for products, your business can receive compensation for this loss. |
You'll Know It's the Right Policy If It Covers:
- Your business' monetary and asset losses
- Either your whole company or select employees
- Subcontractors
- Liability claims made by a customer
What's Not Covered by a Fidelity Bond:
- Errors and omissions
- Bodily injury
- Breach of contract
- Employee misdeeds that do not result in loss of assets or money
What Are the Limits of a Fidelity Bond?
The Bond will only cover claims up to the amount written into the policy. This means a Fidelity Bond of $500,000 will only cover that amount. If you must pay an amount beyond this, you will be liable for the amount not covered by the bond. Some bonds are also limited to claims made during the time you hold the policy. Others may allow for claims that relate to theft or fraud that happened at an earlier date.
How Much Does a Fidelity Bond Cost?
Fidelity Bonds can be purchased in various amounts, depending on your need. Coverage costs are typically a small percentage of (anywhere from .5% to 2%) of your total coverage amount. For example, a $500,000 bond at .5% would cost $5,000 to purchase.