Fidelity bonds
Fidelity bonds
Fidelity bonds protect your company from financial loss if an employee commits fraud, theft, or forgery against a client or your business. They are often required by client contracts.
Why do you need fidelity bonds?
Fidelity bonds provide coverage if an employee's dishonest act, such as theft or fraud, causes you or your clients a financial loss. It's often referred to as an employee dishonesty bond or fidelity bond insurance.
For instance, if an employee steals from one of your business clients, the company where you purchased the bond would reimburse the client for the stolen amount.
Fidelity bonds are not always required by law, but may be mandated in certain circumstances. Your clients will often request or require a fidelity bond to protect their assets from your employees.
You can apply a fidelity bond to cover specific at-risk employees, or you can carry a blanket bond that protects your entire workforce. Any small business, startup, or nonprofit with employees who handle financial information could benefit from a fidelity bond.
Fidelity bonds are recommended if your employees have access to:
- Business or client financial information
- Social Security numbers
- Credit card numbers
- Money and other valuable assets owned by a client
- Other sensitive financial or personal information, such as pension plans
What do fidelity bonds cover?
Fidelity bonds compensate your clients and your business for dishonest acts committed by employees, including:
Fraud
If an employee makes a fraudulent credit card purchase, commits identity theft, or engages in another fraudulent activity, your business might be left on the hook. A fidelity bond compensates your business for an employee’s fraudulent activity.
Theft
When an employee steals equipment or supplies from the workplace, your commercial property insurance policy most likely won’t pay for the missing items. Only a fidelity bond covers employee theft.
Additionally, if your employees have access to clients' homes and offices, they may steal cash, jewelry, and other valuable items. Your fidelity insurance would also cover your clients and their losses, and it is a crucial part of risk management if your employees have unsupervised access to client homes and property.
Forgery
Often, employees who forge checks quickly spend or transfer the money they steal, which makes it difficult for your business to recoup these losses from the employee. A fidelity bond pays for any losses you aren’t able to recover.
Embezzlement
The misuse or theft of company funds, also called embezzlement, is a major risk for companies whenever employees and business partners have access to company finances.
For example, if an employee at a financial services provider is caught writing company checks for their own benefit, a fidelity bond can reimburse your business for the losses.
Employee benefits theft
If you have employee benefit plans, such as a 401(k) plan or pension fund, you must comply with the Employee Retirement Income Security Act (ERISA).
The Department of Labor requires you to buy an ERISA fidelity bond, also known as a fiduciary bond. This protects retirement plan beneficiaries if someone with access to these plans steals funds.
An ERISA bond differs from fiduciary liability insurance. Fiduciary insurance covers individuals or entities responsible for an employee benefit plan against mismanagement claims.
How much do fidelity bonds cost?
Fidelity bond costs vary widely, typically calculated based on the total bond amount.
The cost of fidelity bonds depends on a number of factors that surety companies consider during underwriting:
- The type and size of bond you choose
- Your industry risk factors
- The number of employees with access to sensitive information
- Type of personal and financial data handled by your business
- Credit score
- Deductible, if any
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Who should get fidelity bonds?
Fidelity bonds are crucial for managing risk and preventing loss across a wide range of industries. Clients may require you to carry a fidelity bond if you and your employees handle sensitive information or enter their properties unsupervised.
Purchasing a fidelity bond helps protect your clients' assets. This gives them peace of mind and trust in your company, which can be important when you're just starting out.
Contractors might also need a bond to sign a contract, though it's typically the contractor's responsibility to secure fidelity bond insurance.
Professions where fidelity bonds are often necessary include:
Web hosting companies
An employee at a web hosting company accesses a client’s credit card information and begins charging personal purchases to the card. The client notices and traces the purchases back to the business. A fidelity bond covers the purchases, so the client gets their money back and the business doesn’t suffer reputational damage.
Project management firms
A project management firm discovers that a payroll employee has been forging signatures on checks to embezzle funds from the business. The employee has already spent the stolen money, so the business recoups its losses with a fidelity bond instead.
Web design companies
Laptops keep going missing from a web design company's office. Eventually, the company catches an employee in the act but can’t recover all the missing computers. The company's fidelity bond helps cover the cost of purchasing replacement laptops.
Healthcare businesses
Healthcare professionals assist patients during their most vulnerable times. If an employee takes advantage of a patient, a fidelity bond would protect your organization against liability.
For example, if a caregiver steals a patient's tablet during a visit, a fidelity bond would compensate the patient for the loss.
Cleaning companies
Cleaning professionals often have access to spaces with valuable information and goods. If a janitorial employee takes advantage of the client's trust and steals an item, a fidelity bond would compensate the client.
For example, if a house cleaner steals an expensive piece of artwork from a client's home during a cleaning, their company would be held responsible and financially liable.
There's a specific type of fidelity bond, called a janitorial bond or business services bond, that would reimburse the client for their loss.
Management consultants
Management consultants regularly oversee a business's finances, including employee benefit plans. They often must carry a fidelity bond because of their job responsibilities.
For instance, a business consultant who handles a company's pension plan illegally transfers money from it to their personal bank account. An ERISA bond would reimburse the plan's beneficiaries for the loss.
Security guard companies
Security guards often have unsupervised access to clients’ property, money, buildings, or sensitive information. This makes fidelity bonds necessary in the event that a security guard steals cash or property, commits fraud, or engages in other dishonest practices.
For example, if a night security guard is caught stealing from a contracted client's employees' desks during their security checks, a fidelity bond will reimburse the client for the covered loss.
Top professions that need fidelity bonds
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What isn't covered by a fidelity bond?
While fidelity bonds provide coverage against fraudulent acts, including theft and embezzlement, they also have exclusions.
For instance, a fidelity bond does not cover:
Unfinished work
If your company fails to complete a project or adhere to the specifications of a client contract, errors and omissions insurance (E&O) can cover your legal costs if the client sues. This policy is also known as professional liability insurance.
Work errors
Errors and omissions insurance also helps your business pay legal fees, as well as settlements or judgments, when a client sues over unprofessional or erroneous work.
Client property damage
If an employee accidentally breaks a client’s laptop or causes accidental property damage at a client’s workplace, general liability insurance covers the cost of repairing or replacing the damaged property.
Data breaches and cyberattacks
Cyber insurance covers the costs of data breaches and cyberattacks, including the cost of responding to the crisis and defending your company against lawsuits from affected parties.
Illegal activities by non-employees
Fidelity bonds protect your business and clients against illegal acts committed by your employees, not other third parties.
If someone outside your business steals company property or funds, you would need commercial property insurance to cover the loss.
Failure to deliver promised services
A surety bond would reimburse your client if your company doesn't deliver the promised services.
For example, if your business fails to complete a project within the agreed-upon timeline or fully comply with regulatory standards, a surety bond protects the client against losses.
General liability insurance
Business owner’s policy (BOP)
Errors and omissions insurance
Cyber liability insurance
Workers' compensation insurance
Commercial auto insurance
Other common questions about fidelity bonds
Find answers to frequently asked questions about fidelity bonds.
Is a fidelity bond considered insurance?
Yes. Fidelity bonds are a type of small business insurance that protects you and your company financially. You may be required to carry this coverage based on license and contract requirements.
The main difference between bonds and traditional policies is that bonds typically must be repaid for the amount covered by a claim, while a traditional insurance policy doesn't need to be paid back.
A fidelity bond acts like a traditional insurance policy in that the issuing company covers the loss and does not seek reimbursement from the small business owner. ERISA fidelity bonds must be purchased from a surety company authorized by the U.S. Department of the Treasury. This can further blur the line between a fidelity bond and insurance.
How do you get a certificate of insurance?
With TechInsurance, you can easily download a certificate of liability insurance for your small business, often on the same day you buy fidelity bond coverage or insurance coverage. This comes in handy for companies and consultants that need proof of insurance to sign a contract or a lease and don’t have time to call an insurance company for documentation.
TechInsurance is a trusted insurance expert for all small business owners, including nonprofits, contractors, and consultants, with extensive knowledge of the IT sector and beyond. Our licensed insurance agents are available to answer your questions on coverage options and help you find the right types of business insurance for your company.
What is the difference between first-party and third-party fidelity bonds?
Fidelity bonds can be broken down into two categories: first-party bonds, which protect your own business against losses, and third-party bonds, which protect your clients against losses.
First-party fidelity bonds protect your business
First-party fidelity bonds protect your business when an employee commits fraud, theft, or forgery against your business.
If employees have access to your finances or valuable assets, a first-party fidelity bond can give you peace of mind and provide financial reimbursement if an employee steals from your company.
Third-party fidelity bonds protect your clients
Third-party fidelity bonds protect your clients from fraud, theft, or forgery committed against them by one of your employees.
A third-party fidelity bond reimburses your clients if an employee of your business steals money or property from them.
What are the different kinds of fidelity bonds?
The most common types of fidelity bonds that small business owners buy include:
- Employee dishonesty bond: Protects your business if a worker misuses Social Security numbers, credit card numbers, or other sensitive personal data. To secure a client contract, this first-party fidelity bond is commonly required, especially when working with financial institutions.
- Business service bond: Protects clients when your employees visit their home or office. If a dishonest employee steals their personal property, this third-party fidelity bond would reimburse the client for the loss.
- Janitorial bond: Mostly used in janitorial services, clients will often require this bond before allowing employees onto their property. Janitorial bonds offer compensation to clients if a cleaning professional, such as a janitor or house cleaner, steals from them.
- ERISA bond: Companies with employee retirement plans must have an ERISA bond, protecting the plan's assets from theft and mismanagement.
- Financial institution bond: Banks and other financial institutions must carry these bonds to comply with laws and client contracts.
How do fidelity bonds work?
A typical insurance policy pays out a claim to your business when something goes wrong.
Fidelity bonds function in a similar way:
- If your employee commits theft or fraud against your business, the surety company would compensate you for your loss.
- If your employee steals from one of your clients, the bonding company would reimburse your business, and you would be responsible for reimbursing your client.
Unlike other business bonds, the surety company would pursue repayment from the employee who was responsible for the dishonest act.
What is the difference between commercial crime insurance and a fidelity bond?
A fidelity bond is a type of commercial crime insurance that protects businesses and their clients financially against crimes.
Examples of other types of coverages that protect against crime include:
- Commercial property insurance, which reimburses businesses for stolen and damaged business property. This includes losses from fires and other property damage, such as vandalism.
- Cyber insurance, which financially protects your business after a ransomware attack or other type of digital crime, such as a phishing attack. It also covers accidental data breaches caused by mistakes and oversights.
Is there a difference between a fidelity bond and employee dishonesty insurance?
Yes and no. A fidelity bond is one type of employee dishonesty insurance. However, it can also refer to an endorsement for commercial property coverage that protects your small business from an employee stealing from you. You can often add this coverage to a business owner's policy.
How do I get a fidelity bond and business insurance?
Different businesses have different needs and risk levels when it comes to employee fraud. Luckily, you can choose a fidelity bond amount that fits your needs, which helps keep costs affordable.
Fill out an application today to get free insurance quotes from the country’s most trusted insurance providers. When applying for quotes, TechInsurance's licensed agents can also help you add fidelity bonds to your coverage.