Fidelity Bonds for Small Businesses
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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.

When do small businesses need fidelity bonds?

Any business with employees who handle sensitive financial or personal information could benefit from a fidelity bond, which is a type of surety bond. Fidelity bonds provide coverage when an employee's dishonest act causes financial loss. That includes:

  • Embezzlement
  • Forged signatures or other fraud
  • Illegal electronic funds transfer
  • Employee theft of property

Fidelity bonds are not usually required by law. However, your clients might request fidelity bonds to protect their assets from your employees, especially if you work as an independent contractor with a bank or other financial institution.

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.

Read more about fidelity bond coverage.

Employee at laptop stealing money from 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 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. Both are types of commercial crime insurance.

Here's a look at the most common types of fidelity bonds purchased by small business owners.

Employee dishonesty bonds protect your clients' finances

An employee dishonesty bond could reimburse 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 bonds protect your clients' physical property

A business service bond is a type of fidelity bond that 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 bonds protect a cleaning company's clients

For cleaning businesses, a fidelity bond is commonly called a 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.

ERISA fidelity bonds protect your employees' 401(k)

If your business offers an employee benefit plan, you may need a fidelity bond to comply with the Employee Retirement Income Security Act (ERISA). An ERISA fidelity bond covers losses to an employee’s retirement plan caused by a dishonest manager. You may also see it called a fiduciary bond.

Contact a licensed insurance agent if you have any questions, or are unsure which type of bond you might need.

How much do fidelity bonds cost?

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The cost of a bond is a certain percent of the total bond amount. Factors that affect fidelity bond prices include:

  • The 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
View Fidelity Bond Costs

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 an insurance policy.

What is a crime policy vs. 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 liability 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 a fidelity bond vs. 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 protection best fits your business.

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Updated: June 29, 2022
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