What Is a Fidelity Bond?

What Is a Fidelity Bond

You may have heard of fidelity bonds but don’t know what it means. An employer can purchase fidelity bond insurance to cover employees against theft and embezzlement. You can choose to have blanket insurance that covers all employees or to provide insurance for specific employees who have greater access to company assets (e.g., employees with higher salaries)—bank accounts, intellectual property, etc.

Sometimes called ‘honesty bond’, fidelity bonds are designed to protect clients and a company from potentially catastrophic losses if an employee is strategically placed to steal from the company or commit criminal acts that could cause damage to the company’s reputation. Although fidelity bonds are not required by government regulations to protect against illegal activity in most cases, they can be used as an optional safeguard against it. However, such safeguards will still ensure that the consumer doesn’t lose all their money if a company suffers a significant loss.

How do Fidelity Bonds work?

Fidelity bonds function in the same way that insurance does. They are invisible and have no effect on day-to-day operations. Fidelity bonding is only activated when certain events happen, much like an insurance policy. In the case of insurance policies, the trigger event is usually the death or incapacity of an insured person. This causes the procedure to activate and allows for reimbursement. A fidelity surety bond is triggered when a company suffers a loss that is directly related to a criminal act, such as embezzlement.

The bond cannot be transferred between employers nor accrue interest. It is therefore not considered a financial investment. Instead, it is a protection against employees taking adverse actions. The cost of purchasing fidelity bonds depends on many factors, including how many employees the company has, which protections it offers, what type of coverage is required, and how much financial loss they cover.

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Parties involved in a Fidelity Bond

An employer, employees, and the financing company that sells the fidelity bonds to the employer are all parties in a fidelity contract. The finance company or insurance company is liable for the amount. They may also want to establish guidelines for employer hiring practices. The bond’s focal point is the employees and their actions. Therefore, it makes sense that insurance companies would want to protect themselves against potential criminal acts.

Also, the terms may not be in force if certain employees are still in the same position. This is also understandable in the case if scheduled fidelity bonds are used to protect employees who have greater access and potential exploitability. It’s easy for a company to lose coverage if one employee is honest and is fired.