What Is a Fidelity Bond?

What Is a Fidelity Bond?

By Jeff Wolf

If you've heard the term before but aren't quite sure what it is, a good fidelity bond definition would reference the fact that it's a kind of insurance which an employer can buy to protect a business against employee theft, embezzlement, and other losses which aren't normally covered by traditional insurance. This can be in the form of blanket insurance, which covers all employees equally, or insurance which applies to specific employees in positions where access is greater to company assets, e.g. bank accounts, intellectual property, etc.

Sometimes referred to as 'honesty bonds', fidelity bonds protect a company as well as the clients of that company, from the potentially devastating losses which could occur if a strategically-placed employee were to steal from the company, or commit damaging criminal acts such as forgery, which would be harmful to a company's reputation. In the majority of cases, fidelity surety bonds are optional hedges against such criminal activity, although government regulations do require certain businesses to have such safeguards in place, so that consumers don't lose everything when a company experiences a major loss.

How do Fidelity Bonds Work?

Fidelity bonds work in much the same way as insurance does, in that under normal circumstances, they are just in the background having no impact on daily operations. Only when certain events occur does the fidelity bonding come into play, just as with an insurance policy. Of course, in the case of an insurance policy, it's usually the death of an insured person which is the triggering event that activates the policy, and causes a claim to be filed for reimbursement. With a fidelity surety bond, the triggering event occurs when some kind of loss is sustained by a company, which is directly associated with a criminal act by an employee, such as embezzlement.

A bond is not transferable between employers, nor can it accrue interest, so it cannot be considered a financial investment of any kind, but is instead merely a protection against adverse actions from employees. The cost of buying fidelity bonds is heavily tied to such factors as how many employees a company has, what kinds of protections are in place at the business, the type of coverage needed, and the amount of coverage which is needed to protect against financial loss.

Parties Involved in a Fidelity Bond

The parties involved in a fidelity bond are the employer, the employees, and a financing company which sells the fidelity bond to the employer. Since the finance company, or insurance company, stands to be liable for the amount of that fidelity bond if a claim is made, they sometimes want to set guidelines for the employer's hiring practices. Employees and their actions are of course, the focal point of the bond in the first place, so it's only natural that an insurance company would want to protect itself against undue exposure to potential criminal acts.

Then too, the terms of the bond may only stay in effect as long as specific employees remain in specific positions. This too is understandable, because in the case of scheduled fidelity bonds (which cover specific employees in high-profile positions), employees with greater access to assets that are potentially exploitable are the ones that are being insured against. If one honest employee is hired as a company accountant, but is replaced by someone who turns out to be less honest, it's easy to see why the coverage might be voided.

  NFP Surety is a leader in Surety and Fidelity Bonds. Protect your business, and learn more from our surety bonds blog, or see a   List of Surety Bond Types

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