What is a Fidelity Bond?

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Definition:

A fidelity bond is a type of insurance that a company might buy to protect them against the misconduct of employees.

🤔 Understanding fidelity bonds

A fidelity bond is an insurance product companies use to help protect themselves from financial losses. These policies generally compensate a company for any losses they incur at the hands of their employees. If an employee steals from the firm or damages company property, a fidelity bond might cover the financial loss. Some fidelity bonds can also protect other employees. For example, certain policies cover the money in a company’s 401(k) plan (a type of employer-sponsored retirement plan) so the company’s workers don’t pay the price for misconduct on the part of the employees or contractors managing the fund’s money. While some fidelity bonds cover losses as a result of employee actions, third-party bonds specifically cover losses as a result of contractors.

Example

Suppose Samantha owns a boutique clothing store downtown. Though she owns and operates the store, she has a general manager who handles inventory and directly oversees the other employees. While Samantha is closing out the books for the year, she realizes that something isn’t adding up. After further digging, Samantha learns that her general manager has been stealing cash from the registers and clothing from the store. This theft has cost Samantha a lot of money. She has a fidelity bond that specifically covers misconduct from employees. After firing the manager and filing a police report, Samantha is able to file a claim with her insurance company and recover her financial losses.

Takeaway

A fidelity bond is like buying an extended warranty on a product…

When you buy an expensive item for your home, you want to know you’ll be protected if something goes wrong with it. You might buy an extended warranty so that if the product stops working and it’s the manufacturer’s fault, they’ll replace it. Similarly, employers might want to purchase fidelity bonds to protect them from losses when their employees are at fault.

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What is a fidelity bond?

A fidelity bond is a type of insurance policy that protects companies from financial loss as a result of acts committed by employees, including fraud, theft, and dishonest behavior. These policies can help a company recover its losses if an employee steals, or if an employee causes damage that costs the company money.

Suppose a company has a warehouse where they use forklifts and other machinery to move merchandise. When employees come to work in the warehouse, the company trains them to use the machinery. Now let’s say an employee shows up to work under the influence and drives the forklift. They end up damaging the vehicle, as well as a significant amount of merchandise. The employer could use its fidelity bond coverage in this scenario — It would help the company to recover its losses as a result of the employee’s unlawful behavior.

Why are fidelity bonds used?

When a company has money or valuable property on hand and hires employees who have access to those items, it opens itself up to greater risk. Naturally, the company wants to take steps to safeguard those assets by having a protection mechanism in place. Buying fidelity bonds can give companies the peace of mind that if an employee acts dishonestly or unlawfully, the company won’t be stuck paying the price.

What are the types of fidelity bonds?

In general, fidelity bonds protect companies from incurring losses as a result of criminal behavior or misconduct by employees. There are several types of fidelity bonds that many cover different types of actions.

Business services bonds

A business service bond helps a company to recover losses on behalf of its customers’ money, equipment, and personal belongings due to dishonest acts by an employee. Companies may choose to purchase this type of fidelity bond if they have employees going to customers’ homes to work, or managing money for customers.

Standard employee dishonesty bonds

A standard employee dishonesty bond protects companies from financial losses at the hands of one or more employees. This type of fidelity bond could apply in cases of both intentional and negligent acts on the part of the employee This type of bond applies in the case of theft of property, money, or securities.

ERISA bonds

An ERISA bond protects the money in a company’s 401(k) plan or pension plan. The purpose of this type of fidelity bond is to recover any losses that take place at the hands of someone handling the fund. For example, if an HR professional who manages the 401(k) plan steals money, an ERISA bond may cover it. This type of bond protects both the company and the other employees. An ERISA bond is unique from other types of fidelity bonds in that it protects the insured not only from the actions of another employee, but also from anyone else hired to manage the retirement plan. If a company hires a third-party contractor to service its retirement plan, it must purchase an ERISA bond to cover the actions of that company.

Is a fidelity bond required for a 401(k)?

The Employee Retirement Income Security Act (ERISA) of 1974 regulates retirement plans such as 401(k) plans that companies choose to offer to their employees. One of the requirements under the law is that companies that offer these plans purchase ERISA fidelity bonds.

These policies protect the money in the plan from acts of fraud or dishonesty from those with access to the money. To comply with this federal law, companies must get their ERISA bonds through a company on an approved list from the Department of Treasury.

What is a third-party fidelity bond?

A fidelity bond is generally a first-party policy, meaning it provides protection to the policyholder against financial losses at the hands of an employee’s fraud or misconduct. But these policies generally don’t protect third parties from financial loss.

There are two primary situations where a company might use a third-party fidelity bond. The first is to protect its customers in the event that an employee commits a crime that results in losses for the customer. A business services bond is an example of such a policy. A company might also require a contractor to buy a third-party fidelity bond, so that the company is protected against losses at the hands of the contractor.

Who needs a fidelity bond?

Any company with employees who have access to money or property may want to consider a fidelity bond to protect itself from financial losses. But there are a few situations, in particular, that might make a company choose to buy such a bond:

  1. The company offers a retirement plan. Federal law requires that any company offering a retirement plan also have a fidelity bond that protects the money in the plan.
  2. The company employs high-risk employees. Some companies may be hesitant to hire employees with a criminal background. A fidelity bond can help to protect the company against unlawful actions from these higher-risk workers.
  3. Employees regularly handle cash or other valuable assets. If employees have access to money or valuable items they could steal or damage, a company may want a fidelity bond to protect those items.

How do you get a fidelity bond?

Companies can purchase fidelity bonds through an insurance company, just as they would for any other business insurance products they need. If a company already has business insurance, they can generally work with their current company or broker to see about adding a fidelity bond to their set of policies. Fidelity bonds can also be purchased through a surety company, which sells insurance-like products to businesses.

What is the difference between a fidelity bond and a surety bond?

A surety bond is basically an insurance policy that assures a customer that the contractor they hire will complete the job. A contractor pays for a surety bond from a surety company. When the contractor bids on the job, the hiring company knows the work will be completed. If the contractor fails to complete the job, the surety bond compensates the company for any losses they incurred.

Fidelity bonds are different from surety bonds in that companies usually buy them to protect themselves against losses incurred at the hands of their employees. These bonds protect a situation where an employee lies or steals and it costs the company money. A company might buy a fidelity bond that also covers its customers if they sustain financial losses at the hands of one of the company’s employees.

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

Commercial crime insurance is a type of policy that protects companies against crimes committed against them. If an employee engages in dishonesty, forgery, fraud, extortion, or other forms of misconduct, the crime insurance policy can help the company recover its losses.

A crime policy is basically the same thing as a fidelity bond. The real difference comes down to what each insurance company chooses to call the product. Some might call it crime insurance while others may call it a fidelity bond. Others call it a combination of the two, such as fidelity and crime insurance.

What is the difference between a fidelity bond and fiduciary insurance?

A fidelity bond can help to protect the funds in a company’s retirement plan from financial losses at the hands of an individual. These bonds generally protect against instances of fraud or theft. The plan participants (aka the company’s employees) benefit from these bonds, as they protect them from losing their retirement savings.

Fiduciary insurance can also help to provide protection in retirement plans, but in a different way. Rather than protecting the plan’s participants, the fiduciary insurance protects the person managing the funds. If a fund manager is a fiduciary, they have a legal and ethical responsibility to act in the best interests of the plan’s participants. If they fail to do so, they might be subject to a personal lawsuit. Fiduciary insurance is an optional policy that may protect them against personal financial losses.

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The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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