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Fidelity Bonds
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Fidelity bonds

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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?

If your small business handles confidential or sensitive client information, your clients may ask you to purchase a fidelity bond. Even if your clients don’t require them, fidelity bonds help limit financial risk from employee fraud or theft.

Fidelity bonds differ from most other types of business insurance. If an employee at your company steals money or property from your business or a client, they provide reimbursement for the amount that was stolen directly to the client or beneficiaries.

This type of coverage is also called commercial crime insurance.

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Fidelity bonds are recommended if your employees have access to:

  • Business or client financial information
  • Social Security numbers
  • Credit card numbers
  • Electronic funds
  • Other sensitive financial or personal information, such as pension plans

What do fidelity bonds cover?

Fidelity bonds, which are a type of surety bond, compensate your clients and your business for dishonest acts committed by employees, including:

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If an employee makes a fraudulent credit card purchase, funds transfer, or money order, your business might be left on the hook. A fidelity bond compensates your business for an employee’s fraudulent activity.

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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 theft of property by employees.

If you have employee benefit plans, 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 the beneficiaries of a retirement plan in the event of employee theft.

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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.

How much do fidelity bonds cost?

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Fidelity bond costs vary tremendously, mostly calculated as a certain percentage of the total bond amount.

The cost of fidelity bonds depends on:

  • The type and size of bond you choose
  • Your industry risk factors
  • The amount and type of sensitive information your business handles
  • The number of employees with access to sensitive information
  • Credit score
  • Deductible, if any
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Who should get fidelity bonds?

If your employees have access to financial accounts or other sensitive information or assets, fidelity bonds provide financial protection if an employee breaches your trust.

Some small businesses, such as those that build customer databases or payment systems for clients, are more at risk for employee fraud. These companies may have a greater need for a bonding program.

Some other examples 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 isn’t able to recover all the missing computers. The company's fidelity bond helps cover the cost of purchasing replacement laptops.

What isn't covered by a fidelity bond?

While fidelity bonds provides coverage against fraudulent acts, including theft and embezzlement, it also has some exclusions.

For instance, a fidelity bond does not cover:

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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.

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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.

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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.

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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.

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What other important policies do businesses with fidelity bonds need?

Fidelity bonds protect your company against employee theft, but it doesn’t provide liability coverage for other common risks. Small business owners should consider the following additional coverages:

General liability insurance: Pays for expenses related to client injuries and property damage, along with accusations of slander.

Business owner's policy (BOP): Bundles general liability insurance with commercial property insurance, often at a lower rate than if the policies were purchased separately.

Professional liability insurance: Also known as errors and omissions insurance, this policy helps pay for legal expenses if your small business is sued for unsatisfactory or negligent work.

Cyber insurance: Pay for legal expenses, credit monitoring services, and other recovery costs if your small business experiences a data breach or cyberattack.

Workers’ compensation insurance: Required in nearly every state for small businesses that have employees, workers’ comp helps cover medical costs related to work injuries.

Other common questions about fidelity bonds

Find answers to frequently asked questions about fidelity bonds.

How do you get a certificate of insurance?

TechInsurance is a trusted insurance expert for all small business owners, including nonprofits, contractors, and consultants, with extensive knowledge of the IT sector. 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.

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.

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 types of fidelity bonds exist?

Three of the most common types of fidelity bonds that small business owners buy include:

  • Employee dishonesty bond: Protects your business in the event that a worker misuses Social Security numbers, credit card numbers, or other sensitive personal data. In order to secure a client contract, this bond is commonly required especially when working with financial institutions.
  • Business service bond: Offers protection to clients when your employees visit their home or office. If a dishonest employee steals their personal property, the 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 in the event that a cleaning professional, such as a janitor or house cleaner, steals from them.

How do fidelity bonds work?

Fidelity bonds operate differently than typical insurance policies. Most insurance policies, such as general liability or workers' compensation, pay out a claim to your small business when there's a mishap or accident. Fidelity bonds will instead reimburse the client if an employee steals from them.

Another major difference between a fidelity bond and insurance policies is that you must then pay that amount back to the insurer or bonding company. For this reason, it's helpful to view a fidelity bond more like a line of credit than a form of insurance.

Is there a difference between a fidelity bond and employee dishonesty coverage?

Yes and no.

Employee dishonesty coverage is another term used for a fidelity bond. 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 levels of risk when it comes to employee fraud. Luckily, you can choose a fidelity bond in the amount that you need, which helps keep the cost affordable.

Fill out an application today to get free insurance quotes from the country’s most trusted insurance service providers. When applying for quotes, TechInsurance's licensed agents can also help you add fidelity bonds to your coverage.