A Fidelity Bond provides coverage that protects an organization from theft, and dishonest acts of employees, members, or volunteers. These Fidelity Bonds are often referred to as employee dishonesty bonds or employee dishonesty insurance. Fidelity Bonds were originally three-party agreements, like most surety bonds. However, over the years, they have transformed into two party insurance coverage. 

According to FinancesOnline, 49% of businesses suffer from employee theft. A typical employee theft lasts 14 months before it is detected. While larger businesses may be able to absorb the financial impact, small businesses often cannot. I have personally seen the devastation that an employee theft can cause. I had a small contractor have millions embezzled by a trusted employee. The employee was so close to ownership that she even watched their children.

Employee theft can be devastating to a company financially, morally, and can have even broader reputational consequences if the theft is from a customer of the business.

Most businesses need some type of Fidelity Bond. In fact, the U.S. Department of Commerce attributes a staggering 30% of all business failures to dishonest acts of employees. Theft and dishonest acts can be devasting to a business, its customers and its employees. As mentioned above, businesses that are around customer assets are particularly at risk and certainly need coverage. These third-party Fidelity Bonds are often referred to as Business Service Bonds. Other common Fidelity Bonds include ERISA Bonds and Financial Institution Bonds.

For example, a company’s 401k plan holds $5 million in assets and has 3 individuals who handle plan assets. Each individual would need to be covered by the maximum $500,000 in ERISA Coverage.

Businesses should also consider that 10% is the minimum coverage and more should often be purchased. Losses of employee retirements assets would tarnish the company’s reputation and likely put them out of business.

These ERISA Bonds protect savers in the event that someone from the company steals from the plan or acts dishonestly. ERISA Bonds DO NOT protect against financial losses from investment performance. 

Because they apply to a government obligation, ERISA Bonds are required to be written by a surety bond company on the U.S. Treasury 570 Circular. However, some Fidelity Bonds issued by Lloyds of London may be accepted. 

Another common Fidelity Bond is a Financial Institution Bond. Financial Institution Bonds are required by many companies that handle customer money and investments such as banks, credit unions, broker dealers, private equity, trust funds, and insurance companies. 

Financial Institution Bonds can be broad and written to protect a wide range of theft and dishonesty. Common coverage also includes things such as computer fraud, wire fraud and impersonation fraud. 

Fidelity Bonds can either be very easy or complicated to obtain depending on the type and size. Many standard commercial insurance policies contain some crime coverage and may even cover some ERISA liability. Many businesses may need or choose to purchase additional amounts. 

Many Business Service Bonds and ERISA Bonds up to $500,000 can be purchased with just a simple application.

More complicated and larger Fidelity Bonds generally require a review of the company’s financial statements. They may also require detailed information on the company’s procedures to prevent theft and dishonesty. 

First-Party Coverage Fidelity Bonds up to $100,000 can be purchased online instantly with little information. Simply click on the Fidelity coverage amount needed on the table below. 

Loss prevention is important for all companies and is a key consideration to underwriting Fidelity Bonds. Some best practices include:

There are many other practices, but Fidelity Bond companies will want to make sure companies have standards and practices in place to limit losses. 

When underwriting Fidelity Bonds, a surety bond underwriter will often want to know the number of employees a company has. More employees increase the risk and cost of the Fidelity Bond as it presents more opportunity for theft and dishonesty. 

It is a standard practice that Fidelity Bonds contain a “Prosecution Clause” or “Conviction Clause”. 

Conviction Clauses should generally be avoided. A business has relatively little control over whether conviction will occur. These clauses have been regularly replaced by Prosecution Clauses. Prosecution Clauses can be difficult for a company. In many small businesses, the people that steal are often long-term employees, that are close to management. Even when these individuals steal or commit dishonest acts, it can be difficult to pursue legal prosecution against them. 

Fidelity Bond companies view Prosecution Clauses as vital risk management, however, First, key people know that they will indeed face legal consequences if they steal or commit dishonest acts. Secondly, it prevents collusion and fraud between and company and its key employees. For example, without a prosecution clause, two executives could conspire to steal from the company by making an agreement that one will not seek prosecution against the other if one is caught. 

The cost of a Fidelity Bond depends on the amount of the bond, the purpose of the bond, and how many employees it will cover. For example, a three-year ERISA Bond cost about 0.25% of the bond amount. Therefore, coverage for $100,000 ERISA Bond would cost about $250 for three years. 

Coverage for other Fidelity Bonds can vary. Business Services Bonds generally cost between 0.5% - 2%. Financial Institution Bond cost vary widely depending on the size, financial strength and risk management practices of the company. 

Almost all businesses should have some Crime Coverage or Fidelity Bonds in place. Common businesses needing these bonds include Janitorial Services, Non-profit organizations, retail, restaurants, accountants, attorneys, money transmitters, gas stations, home care and residential contractors. However, many other businesses should consider this coverage as well. Anyone with access to cash, payments or record keeping is particularly high risk for an employee dishonesty claim.

As employee theft and dishonesty losses continue to increase, Fidelity Bonds are becoming more necessary for all businesses. Fidelity Bonds are not surety bonds, but they are valuable insurance coverage that should be a part of every company’s risk management. Individuals and companies can learn more about surety bonds, including frequently asked questions, by visiting our Guide. Contact Axcess Surety today for help with Fidelity Bonds or any other type of surety needs.