Fidelity Bonds

What is a fidelity bond?

A fidelity bond is a specialized type of insurance that protects your business against monetary or physical losses caused by employee fraud, theft, forgery, or other misconduct. Certain forms of fidelity bonds also protect against monetary or physical losses as a result of misconduct by subcontractors. Any business owner with employees in a position of trust should consider fidelity bonding as part of a risk management strategy.

How much does a fidelity bond cost?

Fidelity bonds can be relatively inexpensive, costing as little as 1% to 3% of the bond's full coverage amount. For example, the premium for a $10,000 bond would cost $100 to $300 each year.

Other factors that can affect cost include the type of coverage you need and the number of employees covered.

Why do I need a fidelity bond?

Fidelity bonds are useful in managing the risk of possible theft, embezzlement, or fraud by an employee. Getting bonded may also instill trust in your customers. Some states require a fidelity bond in addition to a surety bond, so be sure to review your state's requirements or contact NNA Surety Bonds for assistance.

How do fidelity bonds differ from surety bonds?

A surety bond is a three-party legal agreement among the principal(you or your business), the obligee (usually a government entity), and the surety (the company providing the bond).

There are surety bonds specific to hundreds of different business types, and they are frequently required in order to obtain a state or municipal business license.

Fidelity bonds differ from surety bonds in the following important ways:

• A fidelity bond protects your business from fraudulent, dishonest, or illegal behavior by your employees whereas a surety bond protects your customers should you as a company fail to meet your obligations.
• Fidelity bonds are a simpler two-party agreement between your business and the company that issues the bond, rather than the three-party agreement structure of a surety bond.
• Fidelity bonds are not industry-specific, so there are only a few types to cover many different businesses.
• Fidelity bonds are typically designed to cover long-term relationships and not short-term projects.

What are the main types of fidelity bonds?

The three major categories of fidelity bonds are business services bonds, employee dishonesty bonds, and ERISA bonds.

• Business services bonds protect customers from theft by employees performing work at your customer’s location.
• Employee dishonesty bonds protect your business from the consequences of employee misconduct.
• ERISA bonds protect your company's retirement plan assets against misconduct by employees, specifically those who have access to such assets. ERISA stands for Employment Retirement Income Security Act, which sets standards of conduct for managers of private sector employee benefit plans. The government may mandate ERISA bonds.

Other types of fidelity bonds include blanket bonds and schedule bonds.

• Blanket bonds cover all employees of a company. Large companies, companies with a lot of employee turnover, and nonprofit organizations often utilize a blanket bond.
• Schedule bonds cover specifically identified employees. These employees are often ones with greater responsibility — usually handling large monetary transactions.

First-party vs. third-party fidelity bonds

Fidelity bonds can be either first-party bonds or third-party bonds. First-party fidelity bonds protect your business against employee misconduct. Most of the bonds described above are first-party fidelity bonds.

If you have subcontractors working for your company, third-party fidelity bonds protect your business against wrongful acts committed by the independent contractors you've hired.

Sometimes a third-party fidelity bond is a requirement for doing business. For example, companies in finance or banking typically require their subcontractors to purchase fidelity bond coverage to protect them against theft losses.

If you are ready to apply, or if you need more information about fidelity bond requirements, we are here to help. Call NNA Surety Bonds at 855-711-0276 or fill out the quote request form.

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