What Is a Fidelity Bond? A Guide for Employers

You’ve worked very hard to build your business, and you’re likely willing to do anything you can to protect and secure your hard work. A fidelity bond, like other forms of insurance, can keep your business safe if an unfortunate, unexpected event should occur. Insurance is a key part of any business, whether it’s workers’ comp, a fidelity bond, or otherwise.

Here’s what employers need to know about fidelity bonds and how to use them to their advantage.

What Is a Fidelity Bond?

Businesses carry a lot of insurance, and insurance can be the difference between recovering from a disaster or having to close your doors. Insurance policies protect your future and come to the rescue when you need help. Business insurance is incredibly important.

Insurance policies can protect you from disasters, security breaches, and theft of services. Insurance companies can offer more than disaster protection. Some providers offer business owners crime insurance policies that shield them from losses they may face due to the actions of the people they hire, and workers’ compensation is another form of insurance that aims to protect employees from injury and illness.

A fidelity bond is designed to protect you from the deliberate bad actions of employees. Fraud, deception, or theft by employees can lead to large financial losses and reputational damage. Fidelity insurance is there to help you recover from the harmful actions of employees who have abused your business financially.

Why Do Businesses Use Fidelity Bonds?

Fidelity bonds are an important part of risk management. Most of the choices you make in running your business would be considered risks, and it’s important to ensure that risks are well calculated. A fidelity bond will protect you against the risks you assume when you hire employees.

Employees who commit crimes like stealing from customers, stealing from the safe, committing fraud, laundering money through your business, burglary, embezzlement, and forgery can have an overwhelmingly negative impact on your business. Fidelity bonds are used to protect a business against the financial harm caused by the criminal actions of employees.

What Are the Three Most Common Types of Fidelity Bonds?

There are several types of fidelity bonds. The two types of fidelity bonds most commonly utilized by small to medium businesses are employee dishonesty bonds and business services bonds. These bonds protect businesses, as well as their clients or customers, from deceitful or fraudulent actions committed by employees.

Some businesses may benefit from an ERISA fidelity bond, especially if employees are offered retirement funds or pension plans.

Employee Dishonesty Bonds

Employee dishonesty bonds (also called employee dishonesty insurance) protect your business in the event that an employee steals, mishandles, or misuses confidential information about a customer. For example, using a customer or client’s credit card number, social security number, or banking information without proper consent or authorization would constitute dishonest acts.

Business Services Bonds

Business service bonds protect your business if an employee engages in illegal activities while conducting business outside of your office. If you send an employee to a customer or client’s home or office for a consultation and your employee steals or damages an expensive piece of equipment, a business service bond will protect your business and reimburse the victim for the theft.

Business services bonds only apply to theft or misconduct that occurs during official business. If your employee develops a personal relationship with someone who is also a client or customer and commits theft against them during a personal interaction or social call, you aren’t liable at all. You won’t need to use your business service bond to correct the situation.

ERISA Fidelity Bonds

If your employee benefit plan includes a retirement plan or pension plan, an ERISA fidelity bond can protect your plan assets. The 1974 Employee Retirement Income Security Act requires that anyone who handles retirement funds be bonded for at least 10 percent of the total amount of money they were entrusted with handling in the previous year.

What Are the Two Types of Fidelity Bond Coverage?

The name “fidelity bond” is somewhat misleading because a fidelity bond doesn’t act as a bond. It’s a full-fledged insurance policy and it works just like any other type of insurance policy. Employers can choose between two types of fidelity bonds (or utilize both) for protection from harmful employee actions.

First-Person Fidelity Bonds

First-person fidelity bonds are used strictly to protect employers from their employees’ actions. They protect anyone who has a current employment agreement with the company or whose role would be considered that of an employee.

First-person fidelity bonds are arguably the most important. Your primary liability is your employees, particularly if you have a significant amount of employees. It can be difficult to keep track of everyone’s behavior or thoroughly audit each employee’s performance. A first-person fidelity bond can give you peace of mind in the event that you don’t spot any warning signs of misconduct before it’s too late.

Third-Person Fidelity Bonds

Third-person fidelity bonds are used to protect employers from deceptive actions committed by independent contractors or other people who perform contract work. In other words, anyone who performs work for your business on a non-employee basis would be covered by a third-person fidelity bond.

Third-person fidelity bonds are usually more important for sole proprietorships that bring on occasional help or outsource certain tasks. They’re also useful for seasonal businesses or businesses that only bring on additional contractor help for certain events.

How Do Fidelity Bonds Work?

Hopefully, you will never need to use your fidelity bond. In the event that something transpires and your fidelity bond covers, you’ll file a claim with the insurer that holds your fidelity bond. Your insurer may require you to submit documentation (like police reports) that prove that the crime took place. They may also want proof of the total financial damages caused.

Depending on the type of insurance coverage you have through your fidelity bond and the amount of your deductible, you’ll receive a portion or the full amount of compensation necessary to remedy the situation.

What Does a Fidelity Bond Cost?

Fidelity bonds can vary significantly in cost. The cost of a fidelity bond largely depends on the amount of coverage you choose and the industry you work in. Research different providers and speak with them about your needs. Consider your budget and the amount of coverage you need, and speak with your trusted advisors. Get all the information you need to make an educated business decision.

Does My Business Need a Fidelity Bond?

A few types of businesses are required to have fidelity bonds. Companies in the security industry and companies in the insurance industry must have fidelity bonds because employee missteps in these industries can have serious consequences for customers or clients.

If your business niche doesn’t declare fidelity bonds necessary, you aren’t required to have one. Contemplate the needs of your business and the peace of mind you may obtain by having a fidelity bond. If you feel as though it’s worth it to invest in a fidelity bond, you should always do what’s in the best interest of your business, your employees, and your customers.

Does My Business Need Both Types of Fidelity Bonds?

If your business is anything other than a sole proprietorship, you have employees. Businesses of all sizes may benefit from a first-person fidelity bond. If you have a significant amount of employees, there’s a higher likelihood that you may spot a bad apple in the bunch. You’ll be thankful to be prepared with a fidelity bond, though you’ll hopefully never need to use it.

You only need a third-person fidelity bond if you utilize outside contractors or independent contractors to provide work for your company. If you don’t, then a third-person fidelity bond wouldn’t be a necessity for you.

How Mosey Can Help Your Small Business

Some businesses are required to maintain a bonding program to protect their customers against employee theft or misappropriation of funds. Fidelity bonds are an important part of compliance for businesses. As a business owner, you already have a lot to keep track of. Let Mosey help.

Mosey’s compliance automation dashboard can help you keep track of state compliance requirements. You can spend more time focusing on maintaining and growing your business while Mosey keeps track of compliance in the background.

Schedule a demo with Mosey to learn how we can simplify the process of running your small business.

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