What Is A Fidelity Bond & Do You Need One?
If you are a small business owner, a fidelity bond might be a crucial part of your risk management plan. Find out why, what it is, and how much it costs.
You’ve probably asked yourself, “What is a fidelity bond?” as you’ve been looking through the different kinds of available business insurance. Fidelity bonds are one form of risk management you may need if you’re looking to protect your business, employees, or customers from financial fraud, employee dishonesty, or outright theft.
This type of insurance policy is also referred to as a commercial crime policy. And in some states, fidelity bonds are required to get a business license.
Keep reading to find out what fidelity bonds are, whether you need them, and what you can expect when you sit down to make a purchase.
Table of Contents
What Is A Fidelity Bond?
Fidelity bonds are a kind of business insurance designed to protect either your business or your customers from acts of employee dishonesty, fraud, or theft.
Insurance policies generally do not cover illegal and deceitful acts by employees, which can lead to lost assets, financial strain, or even bankruptcy. Being bonded for fidelity gives you the means necessary to protect against many different types of bad behavior, which is a comfort to people who want to hire you. (Especially, but not limited to, businesses that are in and out of people’s homes, such as a cleaning business.)
Whether or not you should add fidelity bonds to your risk management plan depends on whether your employees have access to valuable assets and information. If your business deals in the financial sector or is in and out of people’s homes, then fidelity bonds may be required by law.
One important note: Even though it’s technically called a bond, a fidelity bond is not a financial asset and does not yield interest. Make sure you talk with an expert to get the correct and appropriate coverage for your business.
How Do Fidelity Bonds Work?
Fidelity bonds protect your business from crimes your employees may commit. But this is where things sometimes get hairy — technically, an employee could be a W-2 worker on your payroll, a contractor/freelancer, or even a volunteer. How does a fidelity bond protect you in each scenario?
This is where fidelity bonds are split into two different kinds — first-party and third-party. Unpacking those a bit:
- First-party fidelity bonds protect your business from illegal activities, such as fraud and theft, committed by employees on your payroll. Sometimes this also includes volunteers.
- Third-party fidelity bonds provide protection against illegal activities performed by a contractually employed worker.
Depending on the type of fidelity bond you have and the malfeasance an employee commits, this will trigger a claim for which you can be compensated. Always check the terms of your contract to see if any occurrences that would trigger a claim are excluded.
Fidelity bonds work differently depending on the kind you purchase (more on that below). They can protect your employees and customers as well as your own business.
For example, suppose one of your employees deliberately mishandles your business’s retirement funds for workers on your payroll. In that case, specific fidelity bonds exist to give much-needed financial protection. Or if an employee decides to steal a client’s laptop or wedding ring, that can also be covered under a fidelity bond.
What A Fidelity Bond Covers
At its core, a fidelity bond covers employee theft of money, property, or assets. Because other insurance policies will not protect your business in the event of employee theft, fraud, or other illegal activity, fidelity bonds are essential if your employees handle money or valuables.
Here are the things your fidelity bond will cover:
- Forgery: Forgery is when a document, signature, or other important object is imitated to deceive someone. A fidelity bond covers forgery.
- Embezzlement: When an employee steals company money, the bond will cover the losses.
- Securities Fraud: Stock and investment fraud occurs when investors are given false information in an effort to falsify stock/investments. A fidelity bond will cover this fraud.
- Identity Theft: If an employee uses private information to steal the identities of customers, clients, or other employees, then the bond will cover the losses.
- Computer Hacking: The bond can cover the cost of assisting customers with the aftermath of an employee hacking information and using it illegally.
- Employee Theft Of Assets: If an employee steals from a customer, a client, or you, the bond will cover the replacement cost of the items.
What A Fidelity Bond Doesn’t Cover
If a claim doesn’t fall under the umbrella of theft or fraud, a fidelity bond will not cover it. Here are some things the fidelity bond doesn’t cover:
- Errors & Omissions: If a business is involved in a lawsuit because of a mistake or an omission that cost a client/customer money, it will need errors and omissions insurance to cover this. Accidents and mistakes aren’t covered under a fidelity bond.
- Property Damage: Damages to your property are covered under a commercial property insurance or homeowner’s/renter’s insurance policy.
- Employee Injury: If an employee is injured on the job, worker’s compensation insurance is the coverage needed.
- Bodily Injury: Injuries to a client or customer at your place of business or their own home because of your employee’s actions are covered under a general liability policy.
- Breach Of Contract: A fidelity bond or any other insurance policy does not cover the losses that occur with a breach of contract.
- Employee Actions Without A Financial Loss: Employee destruction, vandalism, or theft without financial losses are not covered.
The 3 Types Of Fidelity Bonds
There are three major types of fidelity bonds that you may encounter as you shop — business service bonds, standard employee dishonesty bonds, and Employee Retirement Income Security Act (ERISA) bonds. As to be expected, each provides a specialized type of coverage. Let’s look into the specifics of each.
Business Service Bonds
If your business goes into other people’s houses, then this bond protects items broken or stolen on purpose by employees. An even more specific iteration of this type of bond is a janitorial service bond which covers — you guessed it — the clients of janitorial service companies. (Accidents are covered under different insurance policies.)
Standard Employee Dishonesty Bonds
If an employee (or group of employees) steals from you or embezzles funds, this bond protects your business from money, securities, or property losses.
The Employee Retirement Income Security Act was legislated to protect employees from dishonest acts by fiduciaries that affect pension and retirement plans. In fact, ERISA bonds are required if your business provides employees with retirement accounts such as 401(k)s.
Who Needs A Fidelity Bond?
In some states, fidelity bonds are required to operate your business. For example, in Oregon, all contractors and car dealerships must be bonded. Check your state’s regulations to make sure your business is legally compliant. Although the law is one of the main reasons you may need a fidelity bond, it isn’t the only reason.
You might need a fidelity bond if:
- The Law Requires You To Have One: Check with your state and see which businesses are required by law to have fidelity bonds.
- Your Employees Handle Money Or Valuables: If your employees have access to important data, money, or expensive assets, then you should acquire a fidelity bond.
- You Collect Private Information From Customers: A fidelity bond can cover losses that occur when an employee steals private information. If your employees have access to private information, consider a fidelity bond.
How Much Does A Fidelity Bond Cost?
Fidelity bonds are quite inexpensive — businesses will usually pay about 1% to 3% of what they decide to pursue in coverage. On average, a fidelity bond will cost anywhere from $100 to a little over $1,000 a year. Insureon’s market research determined that a fidelity bond’s median cost is $88 a month for small businesses. Policies with lower limits are going to be the cheapest. Typically, the lowest limit you can purchase with a fidelity bond is $5,000.
The most important factors involved with setting a price bond for your specific small business ultimately come down to the value of the assets you need to protect, whether your own or your customers’. When you meet with an insurance professional, here are the details you can expect to go over:
- Your specific business risks
- What you want your coverage limit to be
- The type of business you run
- How many employees you have, as well as how many employees you will cover with the bond
- Whether your business will be handling sensitive information
- Whether your employees will be entering and leaving customers’ houses
- The potential costs of employee malfeasance
How To Get A Fidelity Bond
To determine if you need a fidelity bond, ask yourself: What information do my employees have access to? Is my business around valuables?
No matter how much you trust your employees, a fidelity bond is a must for protecting against potential fraud, theft, or other crimes. We want to think the best of people, but as a business owner, you have to prepare for the worst — that’s the world of insurance and the reality of keeping your business afloat.
If you’re set on purchasing a fidelity bond, here are specific steps you can take to get the ball rolling:
1) Research The Market
The process of finding a great policy boils down to research. Know the averages for your industry and compare competing rates and business insurance costs. Start with an idea of the risks your business might face so that you can come to your first meeting with an insurance company equipped with the knowledge of what you need.
One important thing to note if you’re looking to buy ERISA bonds is that the insurer must appear on The Department of Treasury’s Listing of Approved Sureties. So if you were hoping to buy a policy through your current insurance provider, and they aren’t listed, you’ll have to shop elsewhere. It’s also not advisable to purchase other types of fidelity bonds through insurance companies that do not appear on the list since they may not have the resources and operational standards to ensure that you’ll be covered.
2) Have Any Necessary Documents Ready
Before you can buy certain types of fidelity bond coverage — ERISA bonds and employee dishonesty bonds, most notably — you may need to file an application through the insurance provider. The conditions for eligibility will be different whether you’re seeking a fidelity bond as a business or employee.
Also, depending on the coverage limit you’re seeking, you may be asked to provide a credit score (this is uncommon, however).
At the very least, businesses hoping to purchase fidelity bonds should have the following sorts of documents and information ready:
- Details on your business’s daily operations
- Financial statements and a description of the assets you hope to protect (yours and/or your customers’)
- Your EID
- Your current insurance coverage and claims history, such as what’s detailed on a loss run report
Different insurance providers will have different requirements. Depending on the fidelity bond you want, the process may be as simple as filling out basic personal information and following through with a quick, easy purchase.
3) Make A Purchase
If fidelity bonds sound like a good idea for your business, meet with an insurance expert to decide the right amount of coverage and then get shopping. Many sites, such as Coverwallet, Coverhound, and Insureon, will do the comparison shopping for you and walk you through the steps required to make an insurance purchase. Find coverage and peace of mind for your business.