What Is a Blanket Honesty Bond?

A blanket honesty bond is a fidelity bond that protects employers from losses due to dishonest acts of employees. That makes it a type of employee dishonesty bond. Blanket honesty bonds are also known as commercial blanket bonds.

Key Takeaways

  • A blanket honesty bond is a fidelity bond that protects employers from losses due to dishonest acts of employees.
  • The main benefit of blanket honesty bonds is that they prevent small companies from going bankrupt due to a single employee's dishonesty.
  • By separating the decision to employ someone from responsibility for their dishonesty, blanket honesty bonds create a moral hazard problem.

Understanding Blanket Honesty Bonds

Blanket honesty bonds and other fidelity bonds are types of insurance. Acts covered can include theft, embezzlement, forgery, and destruction of assets. A Blanket honesty bond may also cover forged checks, counterfeit currency, fraudulent trading, property damage, and other dishonest acts by employees. Losses from such actions are covered even if the employees responsible cannot be identified.

The process of buying a fidelity bond helps employers filter out those who are likely to commit crimes. That is because commercially purchased fidelity bonds will not cover employees with any history of dishonest acts. Some businesses, such as brokerages, cash carriers, messenger services, courier services, home care providers, and nursing homes, also obtain these bonds for their clients' security. The owner of the business purchasing the bond may be included in the coverage.

An honesty bond is also known as a fidelity bond, an employee dishonesty bond, or a business service bond. Such bonds either protect a business from wrongdoing by its employees, a business's clients from theft by that business's employees, or both.

These bonds have nothing to do with investing but instead relate to business operations and function like insurance. For employees working on-site with customers, blanket honesty bonds provide the employer with coverage for employees' fraudulent or dishonest acts. For example, such a bond would reimburse a cleaning service employer for employee theft from a customer. The proceeds could be used to compensate the customer.

Blanket honesty bonds protect employers, not investors. If dishonest acts by employees harm investors, they must sue to get direct compensation from the company, which might then turn to blanket honesty bonds for reimbursement if it loses the case.

Other types of dishonesty bonds, such as pension or ERISA fidelity bonds, are tailored for specific employees in an organization, such as those who administer pension plans.

ERISA fidelity bonds are generally required by law to cover at least 10 percent of the assets if a business has a defined benefit pension plan. No deductible is allowed in the bond, and it must be in the name of the plan or trust, not the employer. Alternately, the bond must state that the plan or plans are covered and that the general bond deductible does not apply per ERISA requirements. The bond protects against dishonesty by those handling the company's pension plan.

Benefits of Blanket Honesty Bonds

The main benefit of blanket honesty bonds is that they prevent small companies from going bankrupt due to a single employee's dishonesty.

Many small businesses with little capital, such as cleaning services, have relatively low-paid employees with access to valuable customer possessions. Without blanket honesty bonds, an employee stealing spree could put them out of business if the employee managed to escape justice. Worse yet, this risk might be so high that providing many such services would be too risky to offer them in the market at all, resulting in market failure.

Blanket honesty bonds also help larger firms to engage in better risk management. For example, a large brokerage firm would easily have the capital to self-insure against employee dishonesty. However, that probably is not the type of risk that they know how to manage. It is usually more efficient for brokerages to specialize in managing market risk while outsourcing risk related to employee dishonesty to a dedicated insurance firm.

Criticism of Blanket Honesty Bonds

By separating the decision to employ someone from responsibility for their dishonesty, blanket honesty bonds create a moral hazard problem. With full protection from liability, an employer might ignore signs of employee dishonesty if it benefits them in other ways.

For example, an employer could overlook the fact that a salesperson frequently lies if the salesperson also brings in a lot of money. Deductibles and background investigations indeed limit this moral hazard. However, moral hazard is an inherent problem with blanket honesty bonds simply because insurers do not have the opportunity to work with employees every day to observe their honesty like employers.