Fidelity bonds are a type of surety bond that protects employers against the financial consequences of employee dishonesty. They provide a way for them to recover funds lost as a result of employee theft, fraud, embezzlement, or other crimes. In some ways, they are more like insurance than typical surety bonds. This is because a fidelity bond is more of a 2-party agreement (as opposed to 3, in surety) between the insurance company and the insured.
What Are Fidelity Bonds?
There are three main types of fidelity bonds:
- Employee dishonesty bonds, which provide coverage for financial loss due to crimes employees commit on the business premises.
- Business services bonds, which protect customers against loss caused by crimes committed by the employees of a business (such as a cleaning or landscaping service) on the customer’s premises.
- ERISA bonds, which protect employee benefit plans like 401(k) plans against financial loss due to the unlawful or unethical acts of a plan manager.
Any business may benefit from purchasing one or more of these fidelity bonds.
Who Needs Them?
ERISA bonds are required by law, but employers typically purchase employee dishonesty bonds and business services bonds voluntarily to protect themselves and their customers. Without a business services bond, employers could be held liable for financial loss to customers caused by the bad acts of their employees.
But that’s not the only reason to buy fidelity bonds. Being bonded sends an important message to customers about your integrity and commitment to customer satisfaction. That makes them an effective marketing tool as well.
How Do They Work?
There are three parties to any surety bond agreement:
- The obligee that requires the bond
- The principal that purchases the bond
- The surety that underwrites and issues the bond
In the case of an ERISA bond, the obligee is the federal government—specifically the U.S. Department of Labor, which oversees compliance with the Employee Retirement Security Act—and the principal is the ERISA plan (and the plan officials and employees that handle funds or property on behalf of the plan). With fidelity bonds that are purchased voluntarily, the employer is both the obligee and the principal.
Where to Purchase
While ERISA bonds must be purchased from a company that is on the Department of the Treasury’s Listing of Approved Sureties, employee dishonesty bonds and business services bonds can be purchased from any surety bond company licensed to operate in the principal’s state of residence.
ERISA bonds cover specific, named Plan officials who handle or manage the Plan’s assets. Employee dishonesty bonds and business services bonds can cover either specific, named employees or provide blanket coverage for the bad acts of all employees.
The fidelity bond contract spells out the terms and conditions that must be met in order to prevent claims against the bond. Any violation of those terms and conditions can result in a claim by the injured party or parties.
What Do They Cost?
The bond amount for employee dishonesty and business services bonds is entirely up to the employer. The cost of the bond is based on the type of business, the desired bond amount, and the number of employees. Unlike most surety bonds, the principal’s personal credit score doesn’t enter into the picture.
The required amount of an ERISA bond is determined according to ERISA rule. In general, each plan official must be bonded for a minimum of 10% of the funds they handle, with a minimum of $1,000 in coverage. With only a few exceptions, the maximum bond amount for the entire Plan is $500,000. The premium cost is established by the surety as a small percentage of the bond amount. For plans that invest only in publicly traded securities, that percentage is often very low.
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