What Are Fidelity Bonds, and Do You Need One for Your Business?

Every year, organizations lose billions of dollars to employee dishonesty. About 30 percent of business failures are brought about due to employee theft. Simply put, cases of employee fraud can completely wreck your company.

At present, we’re living in times of economic uncertainty. Due to financial challenges, employees may be more tempted than usual to steal from your company or clients.

It is difficult to think that your employee would harm your company. Unfortunately, given current circumstances, the risk is real.

You must invest in fidelity bonds to protect your company against such threats. Best described as a type of insurance, these bonds are beneficial in cases where employees have access to valuable assets or sensitive financial details of the company or its clients.

What are fidelity bonds?

Unlike the name suggests, fidelity bonds are not fixed-income, tradeable security.

This insurance coverage protects your company from financial losses when a single or group of employees steal property or money from your organization or clients while on the job.

Fidelity bonds are also known as “employee dishonesty bonds” or “employee dishonesty insurance.”

In many states, businesses must purchase fidelity bond coverage. Unless they do so, they will not receive their business license.

How do you know you need one?

Professional liability policies do not cover fraudulent, intentional, or malicious activities. On the other hand, commercial property insurance policies do not include money or property theft by company workers. So, you cannot use these policies to cover the harm done by a dishonest worker.

This is where a fidelity bond comes in handy. Fidelity bonds are most useful if:

• You operate a non-profit, medical office, or other business where workers conduct financial transactions on your behalf.
• You own a plumbing, janitorial, cleaning, or other business where workers enter your client’s house.
• You work as a consultant or contractor – in fact, in these cases, your clients may demand that you buy a fidelity bond before you work for them.
• You work as a pension plan trustee – in that case, you’ll need to have an ERISA bond (more on this later).

A fidelity bond is crucial if you’ve hired high-risk workers, including recovering substance abusers, individuals with police records or records of conviction, arrest or imprisonment, and anyone who has declared bankruptcy.

What are the different types, and how much do they cost?

There are mainly three kinds of fidelity bonds:

1. Employee Dishonesty Bond:

This insurance covers a company worker's theft of your funds and property.

Forgery, embezzlement, fraud (such as money order, fund transfer, credit card), burglary, and theft all come under the purview of employee dishonesty bonds.

The bond does not cover theft by partners or owners of the company, loss caused due to independent contractors, and loss of future income due to stolen property.

You can purchase a blanket coverage that covers all employees for the same amount irrespective of their job responsibilities.

Alternatively, you can opt for scheduled coverage that covers different employees for different amounts. For example, a fund manager with access to company funds would be bonded for a larger amount compared to the company janitor.

The pricing for employee dishonesty bonds depends on the number of employees, the type of business, the amount of coverage you want, and the kind of customers you have. These bonds are relatively inexpensive, with the premiums ranging from 0.5% to 1% of the coverage desired.

2. Business Service Bond:

When an employee enters the house of a client to provide service, there is a risk that they may steal money, supplies, equipment, or any other property. Hence, a business service bond can be helpful.

Some businesses that can benefit from a business service bond include pest control, house cleaning, painting or interior decorating, and home health care providers.

A business service bond can be an asset to your company and provide an edge over your competitors since your clients would be at peace knowing that the insurance company would reimburse any property theft. However, remember that the employee must be proven guilty before the bond-issuing organization pays any damages.

The cost of a business service bond depends on various factors, such as the amount of coverage offered, the number of employees, the financial health of your company, and your business experience. If you have a good personal credit score, you can expect to pay a premium between 1 – 3% of the amount covered.

3. ERISA Fidelity Bond:

ERISA, or Employee Retirement Income Security Act of 1974, mandates that a fidelity bond should cover individuals who manage plan funds. This policy insures employer-sponsored retirement plans against losses due to dishonest plan managers.

An ERISA bond covers willful misapplication, wrongful conversion or abstraction, misappropriation, forgery, embezzlement, and larceny, to name a few. Further, keep in mind that fraud doesn’t just include theft of retirement plan assets. It also includes reducing benefits without prior intimation, charging exorbitant fees for 401(k) plans, taking incentives from fund administrators, and so on.

By law, every individual who manages the plan should be bonded for at least 10% of the fund corpus. The coverage should be at least $1,000 or at most $500,000. If the plan has stock options issued by the employer, the manager can be covered for up to $1,000,000.

Getting a fidelity bond

You can get a fidelity bond as part of a commercial crime insurance policy or on a stand-alone basis. If your company is at risk for counterfeiting, extortion, computer fraud, fraud, and so on, getting the bond as part of a commercial crime policy can make sense.

It’s best to approach various insurance companies for quotes and then evaluate and compare multiple policies based on factors like premium charges, coverage limits, and other details.

Choose one that is most cost-effective while meeting your business’s needs.

Employee fraud is a common problem and can even cause business failure. Hence, it’s of utmost importance that you get a fidelity bond to protect your company against such threats.

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