Crash Course in Fidelity Bonds

Fidelity bonds protect businesses from losses caused by employee misconduct, fraud, dishonesty or cybercrimes that may be committed against them. They can also provide the business with a source of funds to remedy harm to consumers caused by a dishonest employee.

How Fidelity Bonds Work

A fidelity bond is akin to what you would think of as traditional insurance. It’s a two-party agreement between the insurer and the insured. The theft or dishonesty of an insured’s employee(s) is the peril and what triggers a claim. Typically, the insured is a business. If a business has employees, one of its risks is that employees may steal from it. To protect against this risk — however unlikely it may seem — a company will obtain a fidelity bond.

A fidelity bond differs from contract and commercial surety bonds in certain respects, including that it’s a two-party, rather than three-party, agreement. Also, unlike surety bonds, it’s the insured purchasing the bond or the policy, and it’s the insured who benefits or makes a claim under the policy.

With a fidelity bond, the insured must incur the loss. There’s a deductible, as well as terms and conditions. This type of bond has other coverages, including burglary, theft and various cybercrimes. Fidelity bonds also have evolved to cover social engineering schemes, where a cyber thief will send an employee an email pretending to be an executive or other representative of the company to induce that employee to transfer funds. A variety of industries and entities are required to obtain fidelity bonds pursuant to statutes and regulations as another way of protecting the consumer, including:

• Homeowner Associations (HOA): In this instance, an HOA would get a fidelity bond to cover anyone who has access to or control over the association’s funds.
• Banks and Credit Unions: In some states, these entities must acquire bonds to cover potential fraud or dishonesty of their treasurers, employees, directors or other agents affiliated with the financial institution. Bond coverage is required for federally insured, state-chartered banks and credit unions.
• Public Officials: A bond that guarantees the faithful performance of duty of a public official and ensures this person honestly handles all public funds. This bond is given to comply with a statute and covers whatever liability the statute imposes.

To learn more about the role of fidelity bonds in state and local government, download “A Government Leader’s Guide to Bonds”.