What is a Fidelity Bond? What You Need to Know

Fidelity bonds offer additional protection to businesses and their clients. While not required in most cases, they can be an effective tool for guarding against the potential fallout caused by the negative acts of a company’s employees.

What is a fidelity bond?

A fidelity bond is a type of surety bond that protects a business or its clients from financial losses resulting from the illegal and dishonest acts of the business’ employees. The specific acts covered by the bond vary depending on its type.

For example, an ERISA bond protects beneficiaries of an employee benefit plan while janitorial bonds protect the clients of cleaning companies.

With a fidelity bond, the protected parties can file a claim against the bond if they are damaged by the bondholder. Doing so allows them to receive financial compensation if the claim is successful.

How do fidelity bonds differ from other surety bonds?

There are a few key differences between fidelity bonds and the other common types of surety bonds. To start, fidelity bonds function as a simple two-party agreement between your company and the surety issuing the bond. 

Regular surety bonds are three-party agreements between a principal, an obligee, and a surety company.

Unlike surety bonds, most fidelity bonds are not required by a government agency. ERISA bonds are an exception as all plan fiduciaries must be bonded.

Additionally, fidelity bonds tend to be less expensive than other surety bonds. Most do not require credit checks and can be issued quickly. If the bond has a higher amount ($100,000 and upwards), the surety may conduct a more thorough underwriting process.

What are the different types of fidelity bonds?

Business service bonds

Business service bonds are used to guarantee the ethical behavior of employees that work on a client’s premises. They are the most common type of fidelity bond. If an employee were to steal from a client, the bond allows the client to seek financial compensation.

Some of the types of businesses that typically get a business service bond include:

  • Cleaning services
  • Moving services
  • Pest control services
  • Landscapers 

Unlike regular surety bonds, business service bonds are not required by a government agency. Instead, companies choose to get these bonds voluntarily as a way to make the business look more reputable. In turn, the company can use the bond as a marketing tool to attract new clients.

Employee theft and dishonesty bonds

An employee dishonesty bond is similar to a business service bond in that it protects against employee misconduct. However, the bonds differ in who they protect. Business service bonds protect your client while employee theft bonds protect your business.

In this sense, the bonds are more like a traditional insurance policy with an insurance company as you pay the surety company to cover the losses for any crimes an employee commits against your business.

Acts that an employee theft bond protects against may include theft, larceny embezzlement, and forgery, among other financial crimes. The bonds are particularly valuable for small businesses as the actions of a single dishonest employee can cause severe financial damage.

ERISA Bonds

An ERISA bond is a type of fidelity bond that is required for those responsible for the administration and handling of funds under an ERISA (Employee Retirement Income Security Act of 1974) benefit plan. An example of one of these plans is a 401(k) retirement plan.

The bonds protect beneficiaries against theft, embezzlement, misappropriation, willful misapplication, and other negative acts on the part of the plan providers.

What does a fidelity bond cost?

Fidelity bonds are less expensive when compared to other surety bonds. The cost for a fidelity bond is based on the type of coverage you need and the coverage amount. There is typically no credit check required so a poor financial history won’t increase your premium.

If you are looking to cover employees, then the number of employees will impact the price of your bond. After you choose a coverage amount, you can see what premium the surety company will charge given your coverage needs and the number of employees.

Pricing for ERISA bonds works a little differently as you do not get to choose your own coverage amount. Each plan fiduciary is required to be bonded for 10% of the plan’s assets. If the plan includes non-qualifying assets worth more than 10% of the plan’s total value, the bond amount is the value of the non-qualifying assets.

Get your fidelity bond online with EZ Surety Bonds

EZ Surety Bonds takes the hassle out of getting a fidelity bond. If you are ready to get bonded, check out our site to find the bond you need. If you need more information about fidelity bonds, get in touch, we are here to help.