Fidelity Bond: Description of A Fidelity Bond

If you entrust your company’s finances and other valuables to your employees, a fidelity bond can financially protect your company from their potential dishonesty. Contrary to common belief, your general liability insurance does not protect your business from the dishonesty of your employees. Some industries actually require a company to invest in fidelity bonds, including insurance companies and non-profit organizations.

An employer can purchase a fidelity bond, also referred to as a crime bond, from an insurance company. A fidelity bond can protect your business from potential employee theft, forgery, larceny and embezzlement. The insurance company from which you purchased your fidelity bond will have to pay you the amount of the bond in the event a bonded employee steals from your company. The insurance company can sue the employee to recuperate its losses.

An employer can apply for three different types of fidelity bonds:

  1. A blanket fidelity bond that covers all of your employees.
  2. A name schedule fidelity bond that lists the employees you want bonded.
  3. An individual fidelity bond that covers one specific employee.

An unbondable person includes someone with a history of substance abuse, or who has a criminal record or a dishonorable discharge from the military. It also includes people with bad credit, or who have claimed bankruptcy or who come from a low-income environment. People with these characteristics are considered high-risk employees and rarely get hired for these sensitive positions, even when they want to turn over a new leaf and become gainfully employed. The U.S. Department of Labor created the Federal Bonding Program (FBP) offering fidelity bonds at a discount to encourage employers to hire people classified as high-risk. When an employer obtains a fidelity bond from the FBP, he can confidently give someone a second chance.

Fidelity Bond: Description of A Fidelity Bond

If your company’s security depends on the honesty of your employees, because the business requires duties such as the handling and transportation of large amounts of cash or stock, you are highly recommended to purchase a fidelity bond. There are many different types of fidelity bonds to cater to the individual needs of each industry. The different types of fidelity bonds available include janitorial services bond, security guard services bond, condominium association bond, ERISA bond and a public official bond.

Your fidelity bond will not cover you for employee accounting errors or bad bookkeeping, nor will it cover poor job performance or injuries. However, your fidelity bond will cover you financially in the event an employee proves to be untrustworthy.

Fidelity Bond: How to Obtain A Fidelity Bond

A fidelity bond will financially protect your business when you depend on the trustworthiness of your employees to handle your company’s valuable assets. An employer can obtain a fidelity bond from almost any commercial insurance company. The Federal Bonding Program offers discounted fidelity bonds to employers willing to hire high-risk employees.

To obtain a fidelity bond, an employer must submit to the insurance company, in writing and on company letterhead, the formal job offer to his potential employee (or employees), personal information about each prospective employee, as well as his job responsibilities, his start date, his salary or wage and any other pertinent information. The written document must also contain the coverage you require for each employee.

After the insurance company receives an employer’s application for a fidelity bond, it is assessed for approval which takes about two or three weeks. An approval is based on several factors:

  • The list of names on the application and whether or not they are bondable.
  • The number of people in contact with the money, jewelry or other valuable assets.
  • The security procedures and handling protocols the employer has in place.
  • The amount of coverage the employer is requesting.
  • The number of losses in the past five years due to the actions of employees.
  • How many years your company has been in business.
  • Other insurance coverage, such as general liability, your business has purchased.

Insurance companies do not do background checks on the potential employees you submit for fidelity bonding. However, as an employer, it is wise for you to do a background check even before you submit their names for fidelity bonding. You request his criminal record, driving record and any other information pertinent to the job.

An individual who would like to cover themselves with a fidelity bond because of a history that has made them unbondable can contact The U.S. Department of Labor’s Federal Bonding Program (FBP):

  1. Call toll free at 1-877-872-5627.
  2. Ask for the address of the FBP office in your area.
  3. Ask for the contact information of the State Bonding Coordinator for your state.

Fidelity bonds can be used by any type of business, such as retail, delivery, janitorial, construction, security or financial businesses. In the event that an employee steals valuables or embezzles money from your company, you can financially recover your losses with a fidelity bond.

Fidelity Bond: Rates for a Fidelity Bond

Fidelity bonds can be obtained from almost every insurance company. Contact your business insurance carrier first to find out what deductions he can offer you for bundling your business and vehicle insurance with your fidelity bond. Like all insurance purchases, contact several insurance providers to ensure you are getting the proper coverage and the right rates for your business needs.

Your fidelity bond premium rate should be less than one percent of your required coverage. The rule of thumb for deciding how much coverage you need is to estimate the dollar value each employee can potentially steal or embezzle from you. Your premium rate will be based on a number of factors, including:

  • The type of business, i.e.: non-profit, financial, retail, security or janitorial services.
  • The number of employees you need bonded.
  • A higher deductible means a lower premium rate.
  • Discounts are offered to employers who purchase multi-year fidelity bonds.
  • The dollar value of the coverage you request. In certain cases where an employee needs to be bonded for more than $1,000,000, a company will be required to submit financial records as well.

The Employee Retirement Income Security Act (ERISA) requires employers to obtain a fidelity bond to cover the fiduciaries who manage your company’s employee retirement funds. The minimum coverage required is ten percent of your assets or $1,000, and the maximum is $500,000. You can request a higher coverage under extenuating circumstances. A standard ERISA fidelity bond can cover you for:

  • One year with $100,000 in coverage for approximately $200.
  • Five years with $100,000 in coverage for approximately $500.

An employer who wishes to obtain a fidelity bond to hire a high-risk employee, can contact The U.S. Department of Labor’s Federal Bonding Program (FBP). The cost of an FBP bond is measured in bond units, which are worth $5,000 in coverage each. One bond unit costs approximately $100 and is sufficient to cover most high-risk employees. There are discounts for the more high-risk employees you hire and the more bond units you request. If you need 100 bond units, your cost will be $85 per unit.

Most states mandate the use of fidelity bonds for most types of businesses. A company that is comprised only of owners and partners is not required to obtain a fidelity bond. Also, fidelity bonds do not cover independent contractors. A fidelity bond will financially protect you and your business from a dishonest employee.

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