What Is A Fidelity Bond & Do You Need One?

Fidelity bonds are a type of business insurance that protect against losses caused by employee theft, fraud, or dishonest acts.

If your employees handle money, sensitive information, or customer property, this type of coverage can help reduce financial risk. In some cases, certain businesses may also be required to carry a bond to meet licensing or regulatory requirements.

In this guide, we’ll explain how fidelity bonds work, what they cover, and whether your business may need one.

What Is A Fidelity Bond?

A fidelity bond is a type of business insurance that protects against losses caused by employee dishonesty, such as theft, fraud, or embezzlement. Depending on the policy, it may cover losses affecting your business, your customers, or both.

Many standard insurance policies don’t cover losses resulting from intentional acts by employees. Fidelity bonds help fill that gap by providing financial protection against these risks.

Whether your business needs a fidelity bond depends on your operations. Businesses whose employees handle money, sensitive information, or customer property — such as financial services or in-home service providers — may benefit from this type of coverage. In some industries or states, bonding may also be required for licensing or regulatory purposes.

Although it’s called a “bond,” a fidelity bond functions like an insurance policy. It does not act as an investment or financial asset.

How Do Fidelity Bonds Work?

Fidelity bonds provide financial protection if an employee or covered worker commits theft, fraud, or other dishonest acts that result in a loss.

Coverage depends on the type of bond and who is covered. In general, fidelity bonds fall into two categories:

• First-party fidelity bonds: Protect your business from losses caused by employees, such as theft or embezzlement. Some policies may also extend coverage to volunteers.
• Third-party fidelity bonds: Protect your business and its clients from losses caused by contractors or other non-employee workers.

If a covered incident occurs, you can file a claim to recover financial losses, subject to the terms and limits of the policy. As with any insurance product, coverage details and exclusions vary, so it’s important to review your policy carefully.

For example, a fidelity bond may cover losses if an employee steals company funds or takes property from a client. Specific coverage will depend on the type of bond and the risks it is designed to address.

What A Fidelity Bond Covers

A fidelity bond primarily covers financial losses caused by employee dishonesty, including theft, fraud, or other intentional acts.

Depending on the policy, coverage may include:

What A Fidelity Bond Doesn’t Cover

Fidelity bonds are limited to losses involving employee dishonesty. They do not cover other types of business risks.

Common exclusions include:

As with any policy, exclusions and coverage limits vary, so reviewing the details of your bond is essential.

The 3 Types Of Fidelity Bonds

There are three main types of fidelity bonds, each designed to cover different risks.

Business Service Bonds

Business service bonds protect your clients from losses caused by employee theft or intentional damage. These bonds are commonly used by businesses that operate on customer premises, such as cleaning or home service companies.

Employee Dishonesty Bonds

Employee dishonesty bonds (sometimes called commercial crime coverage) protect your business from financial losses due to employee theft, fraud, or embezzlement. This coverage typically applies to money, securities, or other business assets.

ERISA Bonds

ERISA bonds are required for businesses that manage employee retirement plans, such as 401(k)s. These bonds protect plan participants from losses caused by fraud or dishonesty by those who manage or handle plan funds.

Who Needs A Fidelity Bond?

Some businesses may be required to carry a bond to meet state licensing or regulatory requirements. Requirements vary by state and industry, so it’s important to check local regulations to determine whether bonding is necessary for your business.

Even when not required, a fidelity bond may be worth considering in certain situations:

• Legal or contractual requirements: Some industries or contracts may require bonding as a condition of doing business.
• Employees handle money or valuable assets: If employees have access to cash, financial accounts, inventory, or other high-value items, a bond can help protect against losses.
• Access to sensitive information: Businesses that handle customer data or confidential information may benefit from coverage against employee misuse.

A fidelity bond can help reduce financial risk in businesses where employee access to assets or information creates exposure to potential loss.

How Much Does A Fidelity Bond Cost?

Fidelity bond costs vary based on your coverage limits and business risk, but they are generally relatively affordable compared to other types of business insurance.

In many cases, businesses pay between 1% and 3% of the total coverage amount annually. For small businesses, this often translates to roughly $100 to $1,000 per year, depending on the level of coverage and risk factors.

Several factors influence pricing, including:

• The value of assets you need to protect
• Your desired coverage limits
• Your industry and overall risk profile
• The number of employees covered
• Whether employees handle sensitive information
• Whether employees work on client premises
• Your history of claims or losses

Because pricing varies by provider and policy, getting multiple quotes can help you find the most accurate estimate for your business.

How To Get A Fidelity Bond

Getting a fidelity bond starts with understanding your business risks and the type of coverage you need.

Assess your risk

Determine whether employees have access to money, sensitive information, or customer property. This will help you decide what type of bond and coverage limits are appropriate.

Compare providers

Research insurers and compare quotes to find coverage that fits your business. If you need an ERISA bond, make sure the provider is approved by the U.S. Department of the Treasury.

Gather business information

Be prepared to provide basic details, such as your business operations, number of employees, assets to be covered, and any prior claims history.

Purchase coverage

You can buy a fidelity bond directly from an insurer or work with a broker to compare options and select a policy that meets your needs.

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.

When you’re ready to make a purchase, check out our guide to buying insurance. Then, make sure you check out our picks for the best small business insurance companies to get started.