You might have heard about fidelity bond insurance if you have explored the different insurance packages to protect your business. For one, fidelity bond insurance is not one of the first insurance packages you would get. It still has not become one of the essential insurance types in the market due to many reasons.
Many businesses do not even think about fidelity bonds insurance when they think about insurance options. However, there are times when you have to step up the risk management strategy of your business, regardless of how small or big the organization is. In this article, we have prepared an ultimate guide to fidelity bond insurance. We have covered vital aspects like the types of fidelity bonds, the average cost of fidelity bonds, and the differences between fidelity bonds and other popular insurance options like surety bonds and commercial insurance. So, regardless of where you stand in terms of experience with these insurance packages, you will know how to navigate further.
What Is Fidelity Bond Coverage?
Despite the name, fidelity bond is not a tradeable bond. Instead, it refers to a commercial insurance package that can protect businesses from damages caused by fraudulent and dishonest activities by one or more employees.
This business insurance can protect against both monetary and physical losses to the organization. As we mentioned earlier, this type of protection applies to the conceptual values of the company instead of the tangible resources.
For instance, if the fraudulent activity by an employee has caused problems to the reputation of an organization, fidelity bond insurance would come to the rescue. We shall explore more examples of such issues in the later sections.
It is also worth noting that fidelity bond coverage is a vital part of a business’s enterprise risk management strategy. While Enterprise Risk Management is a firm-wide strategy, fidelity bonds take care of how the inappropriate behaviors from employees can potentially affect the company’s future and present. A business may pick one of the many fidelity bond insurance packages based on the type of protection they need.
What Does Fidelity Bond Insurance Cover?
We will now try to explain how fidelity bond insurance can help a company.
In general, fidelity bond insurance will help the company cover:
- Illegal electronic funds transfer
- Identity theft
- Unlawful data access
For instance, suppose you have a business that provides dog-sitters on an on-hire basis.
In the worst-case scenario, an employee of yours may use their access to the house to steal something. As you can guess, it is a considerable risk to the company regarding money and reputation. However, if your company has fidelity bond insurance, the insurance package shall provide the coverage you need to make things right.
We can take another example, which talks about a bigger crime. Suppose your company stores all the vital information about your customers’ identity on a secure server. However, an employee with access to these servers may use personally identifiable information to perform identity theft.
Since your business is responsible for securing the data in the best way possible, the customer can sue you. But your company does not have any direct connection to the issue. In these times, a fidelity bond would come to the rescue and provide the coverage to settle or deal with the lawsuit. In this case, the savings are high.
Similarly, fidelity bond insurance may cover various issues that a fraudulent, harmful, or dishonest worker may cause to the company. For instance, if your employee is involved in forgery or embezzlement of funds, you can benefit from the insurance packages.
On the other hand, if some employees have stolen valuable assets from the company, fidelity bond insurance will help you stay secure. Depending on the insurance package you have chosen, there could be more or fewer coverage options. Nevertheless, you might notice that all these coverage options protect your company from risks that you cannot entirely predict.
Types of Fidelity Bonds Insurance
You may also have noticed that a single type of fidelity bond coverage is not sufficient for all businesses.
It may be necessary to pick a specific set of protection options and coverage based on the company you own and the type of transactions you deal with. Anyway, we have listed the fidelity bond insurance packages you can get today.
This type of coverage will help your business cover damages caused by the harmful, deceitful, or fraudulent activities caused by an employee. For instance, employees may use fraudulent options like forging and embezzlement of funds.
In these cases, your business would face the damage. So, first-party coverage will help you take care of these damages by providing the right amount of funds. As you can guess, it is the basic level of protection you can expect from fidelity bond insurance packages in the market.
This type of coverage will help your business to cover the damages caused to your customer by an employee. For instance, let us say that your employee stole a laptop from the customer’s house when they were there to fix a piece of electrical equipment.
You may not always be able to recover the stolen asset and give it back to the customer. In these instances, you can count on the third-party coverage of the fidelity bond insurance. When combined with first-party coverage, third-party coverage can be pretty sufficient.
Although not as popular as first-party and third-party coverage bonds, blanket bond insurance can protect all employees in an organization.
It is excellent when you want to provide maximum coverage to the organization against potential risks. For instance, we can consider a situation where the customer makes a false claim in response to your service. While you may know that your employees have not done anything wrong, you may not have evidence to prove it. A fidelity bond insurance blanket coverage will help you here.
Therefore, depending on the intensity and breadth of coverage you need, you can choose one of the fidelity bond types mentioned above. By the way, some insurance providers may offer customized plans to suit your specific protection requirements.
Business Service Bonds
Business service bonds are types of surety bonds that protect your clients from theft, fraud, or larceny committed by your business. This type of coverage is provided while you and your employees are working at your customers’ premises. Remember that even the most trusted employees can cause a loss as they have access to clients’ valuables.
Standard Employee Dishonesty Bonds
Employee dishonesty bonds are special types of fidelity bonds that protect businesses from dishonest acts by employees. That includes fraud, embezzlement, forging checks, stealing money, and other types of dishonest acts. However, keep in mind that dishonesty bonds don’t cover against employees stealing from customers.
Employment Retirement Income Security Act (ERISA) is a federal US law enacted in 1974 that regulates retirement and health plans in private industry. ERISA bonds are types of surety bonds that cover administrators and other fiduciaries of retirement plans that ERISA regulates. ERISA bonds protect against acts of fraud and dishonesty such as theft, forgery of documents, and assuming duties that create a conflict of interest.
What is Fiduciary Bond Insurance?
Fiduciaries may be required to obtain fiduciary bonds before they are permitted to work. A fiduciary bond, also known as a probate bond, is a legal instrument that protects beneficiaries, heirs and creditors when a fiduciary fails to perform honestly. Also, a court may require a fiduciary bond for anyone who owes a duty of loyalty to protect the interest of another.
Fidelity Bond Insurance Cost
Are you wondering how much you would have to pay for fidelity bond insurance? We cannot give you exact numbers, but we can provide some average figures. Here is the thing about the premium amount of fidelity bond insurance.
Fidelity bonds insurance is relatively inexpensive, starting as low as $100 per year for the minimum coverage. The monthly premium of fidelity bond insurance would depend on the coverage you need. In most cases, the numbers are 0.5% to 2%. For instance, if you are looking for coverage of $10,000 through the policy, you will have to pay $50 to $200 per month.
Once again, insurance providers may consider various factors before they determine the final premium amount. Your experience in business and the company’s general history would play a significant role in determining the premium amount. Different states may have unique laws regarding the calculation of premiums. Here are some other facts that help you understand how much small businesses have to pay for fidelity bond insurance.
According to statistics, around 21% of small businesses spend less than $600 per year on fidelity bonds. But, when we come to the case of 42% of business ventures, they pay somewhere around $600 and $1,200 per year for comprehensive protection. In the end, the remaining 37% seems to pay more than $1200 per year. It tells us a few things.
Most small businesses are not looking for whooping coverage when they get fidelity bond insurance. The majority of small business owners are okay with medium coverage. We must keep in mind that fidelity bond is not the only aspect of enterprise risk management. There could be several other options.
We also have to consider the case of deductibles. Even though people try to get more options for deductibles, it may not be the best option from the coverage point of view. By choosing a fidelity bond with fewer deductibles, you can expect better coverage.
You must also note that you will have to pay extra for a fidelity bond with higher limits. Long story short, it is difficult to predict how much you would have to pay for fidelity bond insurance. However, it is a relief that you have multiple options to choose from.
Now, we will look at the differences between fidelity bond insurance and things that people get confused with.
Fidelity Bond Vs. Surety Bond
Here are the most critical differences between fidelity bonds and surety bonds.
- A surety bond is a legal document where one party guarantees to complete work by a specific point in time and charge a particular amount. On the other hand, a fidelity bond is a type of insurance that can protect businesses against losses caused by deceitful/fraudulent employees.
- A surety bond is used in instances like construction where completion is as substantial as the cost of completion. On the other hand, fidelity bonds can be used to protect a wide variety of businesses across the market.
- A surety bond also requires an insurance company in the back. In the scenario where the principal fails to complete the project on time, the insurance company would cover the losses incurred to the customer. On the other hand, fidelity bonds pay the company and the customer to cover many types of damages in the process.
- Despite the differences, both fidelity bonds and surety bonds can protect your company in different ways. Regardless of who caused the problem — the company or a specific employee —, you would have options to cover the damages.
Even though there are similarities in the protection you get, you cannot use fidelity bonds and surety bonds interchangeably. Of course, your company may get coverage in the end. But, you cannot expect the surety bond to pay for damages when a deceitful employee sabotages the project.
Fidelity Bonds Vs. Commercial Insurance
Fidelity bonds are quite different from commercial insurance. Here are the pointers.
- Fidelity bonds are designed to protect companies from damages caused by unethical or fraudulent employees. On the other hand, commercial insurance will cover the business from various issues like natural calamities, arson, vandalism, etc.
- Fidelity bonds are not so comprehensive compared to commercial insurance. While commercial insurance packages offer peace of mind, fidelity bonds protect you from a specific set of issues only, especially regarding damages from employees.
- You can choose between a wide variety of commercial insurance options from the market, including industry-specific ones. However, you can choose between only a few types of fidelity bonds in the market.
- By choosing a comprehensive commercial insurance package, you may be able to bring down the monthly premium while increasing coverage. However, you would have to pay an extra premium while buying fidelity bonds when you increase the limits.
- Fidelity bonds are not that expensive when compared to commercial insurance. However, it is pretty proportionate to the features and coverage you get in the long run. But, in general, you can get the right fidelity bond insurance for your business even if you cannot afford commercial insurance.
Long story short, even though both belong to the insurance category, the coverage options are different.
Therefore, choosing the right choice from these is quite essential as they are not interchangeable. To take an example, you cannot expect fidelity bond insurance to protect your business from natural calamities or vandalism by third parties.
Fidelity Bond Insurance FAQs
Is a Fidelity Bond the Same as Crime Insurance?
Simply put, fidelity bonds and crime insurance are basically the same things. There are different types of crime insurance depending on the industry and the risks from which you want to protect your business. On the other hand, fidelity bonds are a type of crime insurance that protects businesses from specific fraudulent situations.
How Much Should a Fidelity Bond Cover?
Generally, it is required that there must be a fidelity bond equal to at least 10% of the total assets. Under this general rule, the minimum bond amount is $1,000, which covers your business on total assets up to $10,000. The maximum bond is $500,000 for plans that have assets over $5 million.
What is the Difference Between an ERISA Bond and a Fidelity Bond?
ERISA bonds cover employees who manage or have fiduciary responsibilities for the company’s retirement funds. On the other hand, fidelity bonds cover employees who may not be able to receive bonds because of concerns with their personal background or employment history.
Finally, there are many reasons why fidelity bond insurance and its alternatives might be a good idea for your business. As you may have noticed, these insurance policies do not cost a lot. However, they can do a better job at protecting your business against unforeseen issues.
Did you find this article helpful? If so, make sure you also learn more about how much business insurance costs.