What Is a Fidelity Bond?

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 What Is a Fidelity Bond?

A fidelity bond is a type of insurance policy that reimburses businesses or their clients for losses caused by theft, fraud, or other dishonest acts by business employees. A fidelity bond is not the same thing as a performance bond.

A performance bond guarantees that a contractor will pay the costs for materials and labor as provided in a contract. But in reality, bonds of whatever kind provide insurance coverage of some type.

Is Fiduciary Liability Insurance the Same as a Bond?

Fiduciary liability insurance is not the same type of insurance as a fidelity bond. Fiduciary liability insurance provides coverage for employees as part of an employee benefit plan against liability for breach of fiduciary duty.

Fiduciary liability insurance is a form of risk management used to protect a company’s interests. Fiduciary liability insurance protects the business from claims of mismanagement or breach of fiduciary duty and the legal liability that can arise from serving in management or another role that involves fiduciary duty.

A fiduciary liability policy covers losses and the cost of hiring lawyers to defend against claims of errors and breach of fiduciary duty. Some businesses may not know much about fiduciary liability because the Employee Retirement Income Security Act (ERISA) does not require coverage.

There are many different types of employer liability coverage, but fiduciary liability insurance is the only type of coverage that protects both a company and its employees against claims of negligence, mismanagement, breach of fiduciary duty, or other types of misconduct in the management of a business.

Who Would Buy a Fidelity Bond?

Employers buy the type of insurance offered by fidelity bonds to cover losses caused by employee theft or embezzlement because the losses from these and other fraudulent acts are not covered by traditional burglary and theft policies.

Employers in the following industries would be especially interested in fidelity bonds:

  • Banking;
  • Finance;
  • Investments;
  • Janitorial services;
  • House sitting;
  • Dog sitters;
  • Contractors;
  • Physicians;
  • CPAs;
  • Dentists;
  • Non-profit organizations.

For example, business service bonds are a type of fidelity bond used to guarantee the ethical behavior of employees who work at a client’s premises. They are reportedly the most commonly purchased type of fidelity bond. If an employee should steal from a client, the bond covers the employer if the client should seek financial compensation for the misconduct of the employer’s worker. Companies whose employees work at a client’s premises would be such businesses as cleaning services and others listed above.

No government agency requires a business to have a business service bond. However, a company would choose to get one voluntarily to assure clients that the business is ready to protect the client against losses caused by the business’s employees. This can serve as a marketing tool for attracting new clients.

Are There Different Forms of Fidelity Bond?

A blanket bond covers any losses caused by any and all employees working for a company. Individual bonds cover losses caused by only one specific employee. Pension plans are required to have fidelity bond coverage by the Employee Retirement Income Security Act (ERISA). The coverage required is at least 10 percent or more of the value of the assets in the plan. This requirement does not apply to 401K plans.

Under ERISA, the type of misconduct covered includes the following:

In addition, there are first-party and third-party bonds. A first-party fidelity bond protects a business against wrongful acts, fraud, theft, forgery, and the like, intentionally committed by employees of that business. Third-party fidelity bonds protect businesses against wrongful acts intentionally committed by people working for them as contractors, such as consultants or independent contractors, i.e., third parties.

Business service bonds protect the clients of a business, while employee theft bonds protect the employer’s business. For this reason, the bonds are more similar to a traditional insurance policy purchased from an insurance company, as the business pays the surety company to cover the losses for any crimes an employee commits against the business.

Employee theft bonds may protect an employer against theft, larceny, embezzlement, and forgery, among other financial crimes, committed by an employee. The bonds are particularly valuable for small businesses where the criminal actions of just one dishonest employee can cause significant financial damage.

In partnerships between or among different businesses, any business working as a contractor or subcontractor must provide third-party fidelity bond coverage. However, the other party to the relationship often requests this type of coverage. In many cases, businesses in finance or banking require all of their contractors to carry third-party fidelity bond coverage to cover losses from theft.

How Much Do Fidelity Bonds Cost?

Fidelity bonds are less expensive than other surety bonds. As is the case with all kinds of insurance coverage, the cost for a fidelity bond is based on the type and amount of coverage a business wants to purchase.

If a business wants to cover its employees, the number of employees will affect the price of the bond because it affects the risk. After a business selects its coverage amount, it can get a quote on the premium that the surety company will charge for that particular coverage amount and number of employees.

Pricing for ERISA bonds works differently because the business does not get to choose its own coverage amount. Each fiduciary of a retirement plan must be bonded for at least 10% of the value of the plan’s assets. If the plan has non-qualifying assets worth more than 10% of the plan’s total value, the bond amount must cover the value of the non-qualifying assets.

Does a Fidelity Bond Cover Social Engineering Fraud?

Reportedly billions of dollars have been stolen in recent years in a type of crime known as social engineering fraud (SEF), business email compromise (BEC), impersonation fraud, and other names.

Social engineering fraud is committed when someone close to the insured company impersonates someone associated with the company and tricks the company into transferring funds to the fraudulent party. The person impersonated might be an employee, an executive, a vendor, or a client. These funds are usually transferred offshore quickly, which makes recovery challenging, if not impossible.

Reportedly, the FBI has estimated that billions have been stolen from companies worldwide via this scam. Unfortunately, most traditional insurance policies do not cover the losses attributable to SEF. Bond and policyholders have challenged insurance companies’ denial of their claims in court. However, a 2017 case supported the legal position of the insurers. Travelers Casualty and Surety Company of America, Chubb Insurance company, and Federal Insurance Company have been sued for denying claims relating to SEF losses, and courts have upheld their denials of coverage.

The insurance industry has made coverage for SEF available, but companies have to pay additional premiums for it. In addition, the requirements for qualifying for this type of coverage may be onerous.

Will I Have to Meet Certain Requirements Set by the Insurance Company?

An insurance company may require anyone seeking this coverage to follow certain recommended hiring practices. It may require the insured to be sure that the covered employee’s duties remain the same.

Should I Contact an Attorney about a Fidelity Bond?

Employers need protection against employees and others who may commit fraudulent acts on the job. You want to consult an insurance attorney to learn more about protecting yourself against employee theft. A business lawyer can help you analyze your exposure and decide if a fidelity bond is what you need. A business lawyer will explain how the bond will help you and how to obtain one.

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