What is a Fidelity Bond?

A fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees' fraudulent or dishonest actions. This form of insurance can protect against monetary or physical losses. Fidelity bonds are often held by insurance companies and brokerage firms, which are specifically required to carry protection proportional to their net capital. Among the possible forms of loss a fidelity bond covers include fraudulent trading, theft and forgery. Although they are called "bonds," fidelity bonds are actually a form of insurance policy. They are typically designated as either first-party or third-party; first-party fidelity bonds are policies protecting businesses from wrongful acts committed by employees, while third-party fidelity bonds protect companies from similar acts by individuals employed on a contract basis.

Understanding Fidelity Bonds

Despite its name, a fidelity bond is solely an insurance policy and is neither tradable nor can it accrue interest like a regular bond. It is also known as an "honesty bond."

In Australia, a fidelity bond is called "employee dishonesty insurance," and in the U.K. it's called "fidelity guarantee insurance."

Key Takeaways

  • Fidelity bonds are insurance policies which protect policyholder companies from wrongful acts committed by employees.
  • Fidelity bonds are not tradable securities.
  • This form of insurance is considered a component of a company's risk management strategy.

Why Fidelity Bonds Are Used

Fidelity bonds can be considered part of a business’s approach to risk management. Such an insurance policy as a sort of protection should the company suffer losses caused by fraudulent or criminal employee actions taken against the company or its clientele. This can include cash thefts from the business as well as if the employee steals from a customer of the company. Acts of forgery by an employee that affect the business may also be covered by this type of policy. Robbery and burglary of the company safe, destruction of company property, and the illicit transfer of funds are also covered by fidelity bonds.

Types of Fidelity Bonds

Specialized forms of fidelity bonds may cover particular instances, such as employees committing fraud or illicit acts, while performing services for customers. For example, if a window repair worker is sent to a home that was damaged by a storm and steals jewelry from the residence, the company may have exposure concerning their employee’s actions. Likewise, if a dog sitter were to use their access to a client’s home to steal money, or if a home health provider took clothes or a laptop from a client, a fidelity bond tailored for such circumstances could provide the company coverage its needs.

Some types of fidelity bonds may be mandated for businesses to obtain. Protecting the company’s retirement plan assets can require fidelity bonds in the event an employee gains access to and misappropriates assets set aside for retirement plans. These ERISA fidelity bonds usually encompass bonding anyone who normally has access to the company’s retirement assets. The individuals might be bonded for up to 10 percent of the value of the funds they are permitted access to in the retirement plan.