What is a Fidelity Bond? A Complete Guide

Aug 22, 2022 By Triston Martin

A fidelity bond is a type of business insurance that protects an employer against losses caused by dishonest or fraudulent actions by its employees. This kind of insurance can pay for both money and property losses. Fidelity bonds are not tradeable securities. People think this kind of insurance is a way for a company to deal with risks. Even though they are called bonds, these bonds (Fidelity Bonds) are a kind of insurance for businesses and employers. They keep them from losing money because of employees or customers who do something on purpose to hurt the business. They cover anything that gives an employee an unfair financial advantage or hurts the company on purpose.

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 might cover things like employees who help customers but then commit fraud or other crimes. For instance, when a window repair worker is sent to a storm-damaged house and steals jewelry from the house, the company may be responsible for what the worker did. In the same way, a fidelity bond could protect a company if a dog sitter stole money from a client's home or if a home health provider stole clothes or a laptop from a client.

Certain kinds of fidelity bonds might need to be bought by businesses. If an employee gets access to the firm's plan of retirement assets and takes them for their use, the company may need fidelity bonds to protect those assets. Most of the time, everyone who has access to the company's retirement assets is covered by these ERISA fidelity bonds. The people could be bonded for up to 10% of the value of the money they are allowed to use from their retirement plans.

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.

More Articles
Copyright 2019 - 2023