Fidelity Bonds
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Frequently asked questions about fidelity bonds

A fidelity bond provides reimbursement if one of your employees steals from a client. Learn how to get a bond, when you might need one, and other answers to frequently asked questions.

Fidelity bond requirements and coverages

Who needs a fidelity bond?

Most small businesses aren't required to carry fidelity bonds. However, clients may require you to buy a bond before they will work with you, especially if you specialize in financial services, information technology, consulting, or cleaning.

Other types of bonds are required by law in specific situations. For example, general contractors and electricians typically need license and permit bonds, depending on the laws in their state and the work they do.

Even when your clients don't require it, being bonded builds trust with the people you work for. Your clients know they're protected from dishonest employees, which gives them peace of mind when they hire your company.

What does it mean to be licensed, bonded, and insured?

Depending on your profession and industry, you may need a license, a bond, or insurance.

Being licensed means your company carries a license to do a certain type of work legally. State laws may require you to buy a bond or insurance in order to get licensed.

For example, general contractors in California must carry a surety bond and general liability insurance in order to get licensed.

Being bonded means your business has purchased a bond, such as a fidelity bond or other business bond. If you break a contract with someone you work with, your insurance provider will reimburse them for any financial losses. Unlike insurance, you must then pay this amount back to the insurer.

For example, if a dishonest employee at an accounting firm steals from a client, a fidelity bond would reimburse the client for the money they lost, and the firm would pay that amount back to their insurance company.

Being insured simply means carrying business insurance. When you're insured, the provider will pay for legal costs, property damage, or medical bills, depending on the type of coverage. In exchange for a small monthly or annual premium, you enjoy financial protection against risks like fires, customer injuries, and auto accidents.

Even when bonds and insurance aren't required, they're a good way to establish trust with clients and attract new customers. Anyone you work with knows you'll be covered in the event of an accident, or if your company can't fulfill the terms of a contract.

Clients may choose a bonded and insured company over one that doesn't have coverage, which can give you an edge over competitors.

How do fidelity bonds work?

Fidelity bonds protect your clients from financial losses caused by dishonest employees. They are an agreement between three parties:

  • The principal: Your business, or the entity that is covered and has an obligation to fulfill.
  • The surety: The company that issues the bond.
  • The obligee: Your client, or the entity that requested the bond.

If one of your employees steals from a client, via electronic funds transfer or any other method, then the surety company will reimburse your client for any losses. Your business must pay that amount back to the surety.

Do independent contractors need fidelity bonds?

Independent contractors might also be asked to carry a fidelity bond, especially if they have access to a client's financial information or valuable property.

And if a contractor does plumbing, tree removal, or other work that requires a license or permit, they'll have to comply with the same rules as any business—which could include getting bonded.

How to buy bonds and insurance with Insureon

How much do fidelity bonds cost?

The cost of a fidelity bond is a small fraction of the bond amount, though factors like your credit score and business risks can also affect your premium.

The amount of coverage chosen for a fidelity bond varies widely, ranging from as low as $5,000 to $10 million. Most Insureon customers choose fidelity bond coverage in the amount of $1 million.

How can I get a fidelity bond and business insurance?

It's easy to get bonded and insured with Insureon. You can fill out an online application to get quotes for business insurance. Most applicants can get a certificate of insurance within 24 hours.

At any point, you can consult a licensed agent to add on options such as a fidelity bond or other types of insurance. They'll help make sure you get the right coverage for your risks and your budget.

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Other types of business bonds and insurance

Is a fidelity bond the same as crime insurance?

Fidelity bonds are considered a type of commercial crime insurance. The term refers to several coverages that protect businesses and their clients from theft, forgery, and fraud.

In addition to bonds that protect your clients, you can purchase employee dishonesty coverage that protects your own business. You can typically add this coverage to commercial property insurance or a business owner's policy (BOP) to pay for any financial losses caused by untrustworthy employees.

What is an ERISA fidelity bond?

Businesses that offer benefits to their employees are required by federal law to carry an Employee Retirement Income Security Act (ERISA) fidelity bond. An ERISA bond protects employee benefit plans from losses due to dishonesty and fraud.

Every individual who manages or controls a 401(k) or other employee benefit plan must be bonded, by law, in order to protect the plan's participating employees.

What's the difference between a bond and insurance?

Bonds and insurance both help your small business gain trust with clients, and may be required in some circumstances. However, there are a few key differences:

  • Bonds usually protect your clients or others you work with. Insurance provides financial compensation to your business for covered losses, while bonds reimburse your clients for losses.
  • Unlike insurance, you must pay back the insurer for the bond amount used to reimburse a client.
  • When you buy insurance, you pay a monthly or annual premium for your policy. With a bond, you pay a small percent of the bond amount to have coverage for a certain amount of time, such as six months.

What's the difference between a fidelity bond and fiduciary insurance?

When your business handles money for someone else, both a fidelity bond and fiduciary insurance can play an important role:

  • A fidelity bond covers financial losses for your client or other party, in case a dishonest employee steals from them or mismanages funds.
  • Fiduciary insurance protects individuals who are responsible for other people's money. If someone claims they breached their fiduciary duty, this policy will help pay for their legal fees.

What other types of bonds and insurance do I need?

Fidelity bonds are crucial when you need one to sign a contract, but they're not the most common type of business protection.

Small business owners also buy the following, depending on their needs:

General liability insurance: This policy provides financial protection against customer lawsuits related to slip-and-fall injuries and other accidents.

Business owner's policy: A BOP bundles general liability coverage and commercial property insurance at a discount.

Workers' compensation insurance: Workers' comp covers medical bills, disability benefits, and legal fees from work-related injuries and illnesses.

Errors and omissions insurance (E&O): An E&O policy covers your legal costs if a client sues your business over a mistake, missed deadline, or negligence. It's also called professional liability insurance.

Directors and officers insurance (D&O): This policy protects your board of directors and officers against legal costs related to decisions they make on behalf of your business.

Surety bonds: A surety bond guarantees your business will fulfill the terms of a contract or adhere to standards and regulations. Common examples include license and permit bonds and janitorial bonds.

Updated: May 22, 2024

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