A fidelity bond protects employers from financial loss due to employee dishonesty, fraud and other wrongful acts. It can be used to:
- Protect company assets against employee theft
- Compensate a customer if an employee steals their property
- Reimburse employees if a benefit manager mismanages their retirement funds or other benefits
Although they are a form of insurance, fidelity bonds are written by surety companies. A surety company is different from an insurance company. Insurance agents and brokers place the bonds for their clients, usually for a one-year term that can be renewed annually.
Many businesses have crime insurance for burglary and theft. But crime insurance may not meet legal requirements or provide enough protection if an employee steals from the company. Financial brokerages, cash carriers, security firms, banks and insurance companies are among the industries legally required to have fidelity bonds. Other firms may be required to carry fidelity bonds under contractual agreements with clients.
Types of fidelity bonds
Fidelity bonds usually fall into three main types of coverage:
- Standard fidelity or employee dishonesty bonds are designed to cover crimes committed by employees directly against the employer’s business. These policies insure against employee theft and other dishonest acts, including embezzlement, counterfeiting, illegal fund transfers, and computer fraud.
- Business services or third-party fidelity bonds cover businesses where employees work at customers' properties. If an employee is convicted of stealing from a customer, a business services bond would cover the loss, subject to the policy's limits. Janitorial services bonds and home health care bonds are good examples.
- ERISA bonds are required by the Employee Retirement Income Security Act (ERISA). They cover employers that provide 401(k) and health benefit plans to their workers. Employers must have coverage equal to 10% of the assets they manage, up to $500,000.
Two other types of fidelity bonds are worth noting:
- Condo and homeowners association bonds cover an association from dishonest actions by employees, officers, board members or anyone who has access to the association’s funds.
- Nonprofit organization bonds cover actions by dishonest employees who gain access to the nonprofit’s funds.
Premiums and coverage
Fidelity bond premiums are based on the type of business you operate, the amount of coverage you plan to buy and how many employees you have. A typical fidelity bond might provide $1 million in coverage, but you can purchase a bond for more or less. For industries and occupations that require fidelity bonds, state or local regulation will dictate the minimum coverage amount.
Coverage is sold on either a blanket or a schedule basis.
- A blanket fidelity bond offers the same amount of coverage for all of your employees. A single per-loss limit that applies to all claims.
- A schedule fidelity bond lets you choose which employees or types of positions to cover and their level of coverage.
Fidelity bonds also have ductibles. The amount depends on the size of the bond and how much you are willing to self-insure before the surety company pays a claim. A bond may also have a conviction clause, meaning an employee must be convicted in a court of law before the bond will pay a claim.
When you purchase a business services bond, you can advertise that you’re “bonded.” This may be a competitive advantage for your company since it assures your customers that they are protected if one of your employees steals from them.
ERISA bonds
As noted, ERISA requires employers with 401(k) retirement plans to have fidelity bonds. This protects against fraud by employees who administer the plan or handle its funds.
For most ERISA plans, you won’t need more than $500,000 in bond coverage. However, there are two exceptions:
- Plans that have employer stock must carry $1 million in coverage.
- Plans that hold nonqualifying assets, such as real estate, must be bonded for the greater of either:
- 10% of all plan assets or
- 100% of the value of the nonqualifying assets
ERISA bonds also differ from other fidelity bonds in that they cannot have a deductible.
Preventing employee fraud and dishonesty
You can help prevent fraud and embezzlement by following accounting best practices and instituting security measures. Here are some steps you can take to reduce losses:
- Check job applicants' credentials, employment histories and references before hiring them. Conduct background checks for employees who will have access to cash, electronic funds, inventory or high-security information.
- Institute dual financial controls. Don’t allow one person to deposit money, write checks and reconcile bank statements. Make sure checks are countersigned.
- Limit who can handle cash or has access to secure areas.
- Take inventory regularly.
- Keep storage areas locked.
- Change passwords and building keys whenever an employee leaves. Limit who has access to passwords and periodically change them. Do not leave passwords in the open for anyone to see.
- Include written policies against dishonesty and fraud in your employee handbook and enforce those policies.
Instituting some basic controls goes a long way toward reducing the high cost of employee theft and fraud. A fidelity bond can provide an added measure of financial protection if your business falls victim to employee dishonesty. Talk to us about adding a fidelity bond to your business insurance program.