Fidelity Bonds
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Fidelity bonds

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Fidelity bonds

Fidelity bonds provide reimbursement if one of your employees commits fraud, theft, or forgery against a client or your business. They are often required by client contracts.

Why are fidelity bonds important?

Fidelity bonds, which are a type of surety bond, provide coverage when an employee's dishonest act causes a financial loss.

They’re sometimes referred to as “employee dishonesty bonds” because you can apply them to specific at-risk employees based on their access to sensitive information. Any business or nonprofit with employees who handle sensitive financial or personal information could benefit from a fidelity bond.

Fidelity bonds are not usually required by law. However, your clients might request fidelity bonds to protect their assets from your employees.

This is especially true if you work as a self-employed independent contractor with a bank or other financial institution. This gives your clients peace of mind that their assets are protected, no matter what.

For example, an IT consulting firm or a financial planner might need a fidelity bond to fulfill a client contract. It’s typically the contractor’s responsibility to secure fidelity bond insurance. A nonprofit could benefit from a fidelity bond, if its employees or volunteers handle sensitive donor information.

A small business owner showing proof of fidelity bonds to a client

You may want a fidelity bond if employees can access:

  • Company or client finances
  • Social Security numbers
  • Credit card numbers
  • Electronic funds
  • Other financial or personal information

What do fidelity bonds cover?

Fidelity bonds provide financial coverage when your employees engage in dishonest acts that could otherwise bankrupt your small business.

Specifically, this policy protects your business against:

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Fraudulent activities

If an employee commits forgery, identity theft, or another fraudulent act to steal money from a client, your business could find itself facing a significant financial loss.

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Embezzlement and other misappropriations of funds are risks for companies whenever partners or employees have access to company finances. If an employee writes a company check for their own gain, a fidelity bond can reimburse your company for the loss.

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Property theft

Your employees might have unsupervised access to clients' homes and offices, which brings the risk of employee theft of jewelry and other valuables.

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Theft of employee benefits

Companies with employee benefit plans must comply with the Employee Retirement Income Security Act (ERISA) by purchasing an ERISA fidelity bond, also called a fiduciary bond. This bond protects the beneficiaries of a retirement plan by reimbursing them for losses due to fraud or dishonesty.

How much do fidelity bonds cost?

A small business owner calculating the costs of their fidelity bonds

The cost of a fidelity bond is a certain percent of the total bond amount. Fidelity bond service providers base their cost of a bond on several factors, including:

  • The type and size of the bond
  • Deductible, if any
  • Personal and financial information handled by your company
  • Number of employees with access to sensitive information
  • Your credit rating
  • Your industry
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Who needs fidelity bonds?

Fidelity bonds benefit a variety of industries that have employees who handle sensitive or confidential client information.

However, there are a few professions who need fidelity bonds more often than others, including:

IT professionals

Because of their line of work, IT professionals have the ability to obtain and misuse confidential client information that could cause a financial loss for your small business.

For instance, an IT consultant at your company overbills a customer and steals the excess. Once the crime is revealed, your company’s fidelity bond provides reimbursement for the loss.

Financial planners and advisors 

Financial advisors and planners often have direct access to clients' banking accounts, which can be risky.

For example, an advisor at a financial institution forges a client’s signature on a check and steals thousands of dollars. A fidelity bond would reimburse the client for the stolen money, up to the coverage amount.

Healthcare professionals 

Healthcare professionals work with patients during their most vulnerable times. If a patient is taken advantage of by an employee, a fidelity bond would protect your organization.

For example, if a home healthcare aide steals a laptop from a patient during their visit, a fidelity bond would compensate the client for this loss.

Cleaning professionals

Cleaning professionals and janitorial services are given access to spaces with valuable information or goods. If an employee takes advantage of the client's trust and steals something, a fidelity bond would compensate your client.

For example, if an employee at a house cleaning company steals jewelry from a client's home during a cleaning, the company would be held liability. A type of fidelity bond called a janitorial bond or business services bond would reimburse the client for their loss.

Management consultants

Management consultants directly handle retirement and other pension plans, which has its risks.

For instance, a consultant who handles a company's 401(k) illegally transfers money from the plan to their personal bank account. An ERISA bond would reimburse the plan's beneficiaries for the loss.

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What do fidelity bonds not cover?

While fidelity bond coverage is crucial for several types of small businesses, it does not provide all the protection you need.

For instance, your policy does not include coverage for:

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Illegal acts by non-employees

Fidelity bonds only protect your business and clients from illegal acts committed by your employees. If someone outside your business steals company property or funds, commercial property insurance would cover the loss.

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Failure to deliver contracted services

Surety bonds reimburse a client if your company fails to deliver promised services. If your business fails to complete a project or adhere to regulations, a surety bond protects the client against losses.

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Errors and missed deadlines

Professional liability insurance guards against lawsuits brought by clients claiming your work was unprofessional, erroneous, incomplete, or late. It's also called errors and omissions insurance (E&O).

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Damaged client property

Businesses that work with clients’ computers and other property run the risk of accidental damage. If an employee drops or breaks client property, general liability insurance helps cover the cost of replacement or repair.

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Data breaches and cyberattacks

Cyber insurance helps companies recover from data breaches and cyberattacks. It can pay for customer notification costs, credit monitoring services, and more.

Other important policies for small businesses that purchase fidelity bonds

Fidelity bonds protect against employee fraud, but your small business faces many other risks. You should also consider:

General liability insurance: This policy covers expenses related to client injuries and property damage, such as a slip-and-fall injury at your business. 

Business owner’s policy (BOP): This policy bundles general liability insurance with commercial property insurance. It typically costs less than if the policies were bought separately.

Workers’ compensation insurance: This policy covers medical bills and disability benefits from work-related injuries and illnesses. Most states require businesses with employees to purchase workers’ compensation.

Cyber insurance: Protects small businesses from the high costs of a data breach or malicious software attack. It covers expenses such as customer notification, credit monitoring, legal fees, and fines. This coverage is also known as cyber liability insurance and cybersecurity insurance,

Commercial auto insurance: This policy is required in most states for business-owned vehicles. It can cover property damage and medical bills in an accident involving your company's vehicle, along with theft, vandalism, and weather damage.

Frequently asked questions (FAQs) about fidelity bonds

Review answers to frequently asked questions about fidelity bonds.

What are the different kinds of 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.

The most common types of fidelity bonds purchased by small business owners include:

  • Employee dishonesty bond: Reimburses your clients in the event that an employee misuses Social Security numbers, credit card numbers, or other financial or personal data. It’s commonly required in client contracts with consultants or independent contractors, especially in finance and banking.
  • Business service bond: Protects 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: Clients will often require cleaning companies to secure this bond before allowing their employees onto their property. It compensates clients in the event a janitor or house cleaner steals from them.

How do fidelity bonds work?

A typical insurance policy, such as general liability insurance, pays out a claim to your business when something goes wrong. Fidelity bonds work differently. If one of your employees steals from a client, the bonding company will instead reimburse the client directly.

Unlike insurance, you must then pay that amount back to the insurer or bonding company. A fidelity bond can be viewed more like a line of credit than a form of insurance.

What is the difference between a crime policy and a fidelity bond?

Fidelity bonds are a type of commercial crime insurance, which is a general term for any coverage that protects businesses and their clients financially against crimes. Other forms of crime insurance include:

Commercial property insurance, a crime insurance policy that reimburses businesses for stolen and vandalized property. It also protects against fires and other types of property damage.

Cyber insurance, a policy that protects your business financially after a ransomware attack or other cybercrime. It also helps pay for accidental data breaches caused by mistakes and oversights.

What is the difference between a fidelity bond and employee dishonesty coverage?

Employee dishonesty coverage is another term for a fidelity bond. However, it can also refer to an endorsement for commercial property insurance that protects your own business from employee theft. Small businesses can often add this coverage to a business owner's policy (BOP) as well.

Chat with a licensed insurance agent to find out which insurance coverage best fits your business.

How do I get a fidelity bond and insurance?

Complete Insureon's easy online application today to compare business insurance quotes from top-rated U.S. carriers. A licensed insurance agent will help you add other types of coverage, such as a fidelity bond. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.

Where can I learn more about fidelity bonds?

If you want to learn more about bonds, you can find additional answers in our frequently asked questions about fidelity bonds.

If there are any additional questions you have about coverage or other types of business insurance or bonds, you can also contact an Insureon agent.

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Updated: November 14, 2023
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