Fidelity Bonds

What Is the Definition of a Fidelity Bond?

Everything in business involves risk, and as much as employers might like to think they can trust their employees, it’s also a good idea for them to protect themselves. In most businesses, employees have access to expensive equipment or sensitive information, and while employers may not be able to prevent criminal activity, they can at least insure their losses.

  1. Function

    • A fidelity bond is designed to protect employers from criminal or fraudulent activity of their employees. While fidelity bonds do not cover poor performance or job-related injuries, they do offer protection against crimes like theft, forgery, larceny or embezzlement. Fidelity-bond protection may be a condition of capital investment, such as in California, where nonprofit organizations receiving government grants under the Resources Bond Act are required to have fidelity-bond protection in at least the amount of the grant.

    Features

    • Despite the name, a fidelity bond is really like an insurance policy, and, in fact, is also sometimes called Crime Insurance. Like any insurance policy, the fidelity bond pays up to a specified limit on certain conditions and costs the policy holder a premium. An underwriter evaluates the insured property and the risk of loss and, on receiving the premium payment, issues the bond. If the bond is ultimately paid upon, the carrier can sue the employee to recover its costs or may collect on a policy if it is itself insured.

    Effects

    • The existence of a fidelity bond transfers certain crime-related risk from the employer. By quickly compensating the employer for covered losses and then assuming the burden of collecting from the responsible party, the bond issuer or policy carrier allows the employer to conduct business unencumbered.

    Significance

    • In some states, fidelity bonds are used as an incentive for employers to hire risky individuals who might not otherwise be employable. Michigan, for example, issues the bonds in $5,000 increments up to $25,000 for a period of six months starting on the first day of employment. This Fidelity Bonding Program allows employers to limit their risk and find workers while providing opportunities to individuals who cannot be bonded or insured by private carriers because of some element in their background.

    Types

    • Private fidelity bonds are sometimes offered in an a la carte fashion, allowing employers to build upon a limited agreement to create a customized policy. For example, a bond writer may sell a basic policy that’s limited to theft by employees, but offer the option to include damage to property, fraud, or crimes committed outside the workplace.