Insurance protection comes in various shapes and sizes. If you are looking to protect your business from financial fraud or employee dishonesty, fidelity bonds are one form of risk management you may need. This type of insurance policy can also be referred to as commercial crime policy. Fidelity bonds are a requirement in some states to acquire a business license, so keep reading to find out what they are, if you need them, and what you can expect when you sit down to make a purchase.
What Is A Fidelity Bond?
A fidelity bond is simply business insurance to protect from acts of dishonesty, fraud, or theft.Â In general, insurance policies do not cover illegal and deceitful acts by employees which can lead to financial strain or bankruptcy. Being bonded for fidelity gives you the means necessary to protect against many different types of bad behavior, and that can be a comfort to people who want to hire you for business. (Especially, but not limited to, businesses that are in and out of people’s homes like a cleaning business.)
When you purchase the bond, you will choose either first-party or third-party coverages. First-party coverages are for acts of theft from an employee; third-part coverages are for acts of theft from clients. Note: Even though it’s technically called a bond, a fidelity bond does not yield interest like other types of bonds. Make sure you talk with an expert to get the correct and appropriate coverage for your business.
What A Fidelity Bond Covers
A fidelity bond covers employee theft of money or assets. Because other insurance policies will not protect your business in the event of employee theft, fraud, or other illegal activity, fidelity bonds are an important insurance component if your employees handle money or valuables. Here are the things your fidelity bond will cover:
- Forgery:Â Forgery is when a document, signature, or other important object is imitated with the intention to deceive someone. A fidelity bond covers forgery.
- Embezzlement:Â When an employee steals company money, the bond will cover the losses.
- Securities Fraud:Â Stock and investment fraud occurs when investors are given false information in an effort to falsify stock/investment. A fidelity bond will cover this fraud.
- Identity Theft:Â If an employee uses private information to steal the identities of customers, clients, other employees, then the bond will cover the losses.
- Computer Hacking:Â The bond can cover the cost of assisting customers with the aftermath of an employee hacking information and using it illegally.
- Employee Theft Of Assets: If an employee steals from a customer, a client, or you, the bond will cover the replacement cost of the items.
What A Fidelity Bond Doesn’t Cover
If a claim doesn’t fall under the umbrella of theft or fraud, a fidelity bond will not cover it. Here are some things the fidelity bond doesn’t cover:
- Errors & Omissions: If a business is involved in a lawsuit because they made an error or an omission that cost a client/customer money, they will need errors and omissions insurance to cover this. Accidents and mistakes aren’t covered under a fidelity bond.
- Property Damage:Â Damages to your property are covered under a commercial property insurance or homeowner’s/renter’s insurance policy.
- Employee Injury:Â If an employee is injured on the job, worker’s compensation insurance is the coverage needed.
- Bodily Injury:Â Injuries to a client or customer at your place of business or at their own home but because of your employee actions are covered under a general liability policy.
- Breach Of Contract: A fidelity bond or any other insurance policy does not cover the losses that occur with a breach of contract.
- Employee Actions Without A Financial Loss:Â Employee destruction, vandalism, or theft without financial losses are not covered.
Who Needs A Fidelity Bond?
In some states, fidelity bonds are required to operate your business (for example, in Oregon, all contractors and car dealerships must be bonded). Check your state’s regulations to make sure your business is legally compliant. Although the law is one of the main reasons you may need a fidelity bond, it isn’t the only reason. You might need a fidelity bond if…
- The Law Requires You To Have One:Â Check with your state and see which businesses are required by law to have fidelity bonds.
- Your Employees Handle Money or Valuables:Â If your employees have access to important data, money, or expensive assets then you should acquire a fidelity bond.
- You Collect Private Information From Customers:Â A fidelity bond can cover losses that occur when an employee steals private information. If your employees have access to private information, consider a fidelity bond.
Types Of Fidelity Bonds
There are three major types of fidelity bonds that you may encounter as you shop.
- Business Service Bonds:Â If your business goes into other people’s houses, then this bond protects items broken or stolen on purpose by employees. (Accidents are covered under different insurance policies.)
- Standard Employee Dishonesty Bonds:Â If an employee (or group of employees) steals from you or embezzles funds, this bond protects the losses of money, securities, or property.
- ERISA Bonds:Â The Employee Retirement Income Security Act bonds protect from dishonest acts by fiduciaries that affect employee pension and retirement plans.
Fidelity Bond VS Security Bond
Fidelity bonds and security bonds are very different. Fidelity bonds are purchased to protect your business and clients from employee crimes. Security bonds, also called surety bonds, are a receipt to promise to pay for contract work done. This is something often seen in contractor or building businesses. A surety bond is an agreement to pay for the work when it’s finished; if a business cannot complete their contract, the bond will pay for losses.
Fidelity Bond VS Liability Insurance
A fidelity bond specifically covers bad employee behavior, and it is the only type of insurance policy that covers illegal acts. Liability insurance, however, covers accidents. General liability insurance protects you and your business in the event of a lawsuit or an accident. Specifically, this policy will help cover costs of property damage caused by your business, bodily injury claims, or false advertising claims.
Which Type Of Insurance Is Right For Your Business?
General liability insurance is a great foundational insurance policy for all small business owners. Whether or not you add fidelity bonds to your risk management plan will depend on whether or not your employees have access to valuable assets and information. If your business deals in the financial sector or is in and out of people’s homes, then fidelity bonds may be required by law.
Knowing the risks associated with your business is the best way to determine what insurance coverage you need. Speaking to a business insurance expert is also a must as they know the ins and outs of the laws and will be able to help you find the perfect insurance policies for your business.
How Much Does A Fidelity Bond Cost?
As with all insurance policies, there are many factors involved in pricing bonds for your specific small business. When you meet with an insurance professional, here are the details that affect bond costs:
- Your specific business risks
- How much you want to insure
- What type of business you run
- The size of your business
- How many employees you have, how many employees you will cover with the bond
- The location of your business
Without that information it is difficult to make a guess; however, the average small business owner with $100,000 in bond coverage would pay between $500-$2,000 a year depending on business risks. The general rule when it comes to insurance cost is the riskier the business, the higher the insurance costs.
The process for finding a great policy boils down to research. Know the averages for your industry and compare competing rates and costs. Start with an idea of the risks your business might face so you can come equipped to your first meeting with an insurance company with the knowledge of what you need. To determine if you need a fidelity bond specifically, ask yourself: What information do my employees have access to? Is my business around valuables? No matter how much you trust your employees, a fidelity bond is a must for protecting against potential fraud, theft, or illegal crimes. We want to think the best of people, but as a business owner, you have to prepare for the worst — that’s the world of insurance and the reality of keeping your business afloat.
If fidelity bonds sound like a good idea for your business, meet with an insurance expert to decide the right amount of coverage and then get shopping. Many sites, like Coverwallet, Coverhound, and Insureon, will comparison shop for you and walk you through the steps required to make an insurance purchase. Almost all major commercial insurance carriers offer fidelity bonds, making it easy to find coverage, and peace of mind, for your business.
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