Employee theft, dishonesty, and fraud can wreak havoc on your business and reputation. It may be difficult to think of your own employees in a negative light, but the risks are real—employee theft costs employers billions of dollars every year. In order to obtain protection from these liabilities, many businesses turn to Fidelity Bonds, which can offer coverage for losses caused by employee dishonesty, theft, and fraud.

What is a Fidelity Bond?

A Fidelity Bond is a type of insurance coverage that protects a business with employees against losses caused by theft, fraud, or dishonesty by an employee or group of employees. While commercial property insurance policies do not cover money, securities, or property stolen by employees, and professional liability policies exclude intentional, dishonest, or malicious acts, a Fidelity Bond can help your company manage exposure to these risks. In fact, many states require businesses to purchase Fidelity Bond coverage before granting them business licenses.

Note that a Fidelity Bond has nothing to do with the type of “bond” that is a tradeable, fixed income security.

Why do you need a Fidelity Bond?

Businesses need to purchase Fidelity Bonds in order to protect against dishonest employees and the financial losses that may result from their actions. While it may be uncomfortable to think an employee would commit any fraud or theft, the fact is it is a common occurrence in business, especially when employees have access to sensitive financial information and valuable assets.

Employee theft is a widespread problem that costs employers over $50 billion a year. Small and medium-sized businesses accounted for about 68 percent of employee theft cases. The U.S. Department of Commerce estimates that 30 percent of business failures are caused by employee theft.

Recessions and rough economic times, especially, increase the prevalence of employee theft and fraud due to the added financial strains on your employees. Employees may also steal property from your customers or clients, which you need to insure against to protect the financial interests and reputation of your business.

And while commercial property insurance will protect your company’s business property from theft, it usually excludes theft by employees. Professional liability insurance can protect your business from losses caused by mistakes or negligence, but willful, malicious, or dishonest acts are typically excluded. Fidelity Bonds can give your business the coverage it needs to protect against losses due to employee dishonesty. The coverage provided by a Fidelity Bond can also be purchased under a commercial crime policy as employee theft insurance.

High-Risk Job Applicants & Employees

Fidelity Bonds can offer protection for companies that hire high-risk employees, such as:

• Workers who have records of arrest, police records, conviction, or imprisonment
• Anyone who has ever been on parole or probation
• Recovering substance abusers and anyone being rehabilitated through treatment
• Anyone with poor credit history or who has declared bankruptcy
• Anyone with a dishonorable discharge from the military

Some states offer a free Fidelity Bond for the initial six months of employment for workers with felony convictions or other high-risk markers. There is also a federal program that offers some coverage.

Fidelity Bonds vs. Commercial Crime Insurance

Commercial crime insurance can cover a wide range of threats including theft, fraud, burglary, and forgery against a company whether someone outside of the company stole the property or an employee committed the act. Employee theft coverage, which is a key coverage included within commercial crime insurance, is essentially the same as a Fidelity Bond. It covers the theft of company property by employees.

What are the different types of Fidelity Bonds?

There are three types of Fidelity Bonds that insure against different types of employee fraud and dishonesty:

• Employee dishonesty bond
• Business service bond
• ERISA fidelity bond

What is an employee dishonesty bond?

An employee dishonesty bond is a type of insurance coverage that protects businesses from losses caused by employee dishonesty, theft, and fraud. It covers the theft of your company’s own money, securities, and property. Note that this type of bond does not offer financial protection for employee theft of customers’ property, which can be covered by a business service bond.

Unlawful actions covered commonly include:

• Theft
• Burglary
• Fraud (credit card, funds transfer, money order, etc.)
• Embezzlement
• Forgery

Examples:

• You’re the owner of a sporting goods store, and the sales associate you hired recently has stolen $2,000 from your cash register. The police apprehend him for the crime, and he pleads guilty to stealing the cash, but the money has already been used to purchase illegal drugs. Your employee dishonesty bond will reimburse you for the $2,000 the employee stole.
• Your company’s director of finance has been secretly transferring funds from the company’s bank account into his personal account for the past twenty years. After his embezzling is discovered, your employee dishonesty bond reimburses you for the $500,000 he stole.

There are two types of employee dishonesty bonds:

Blanket coverage bonds all employees in the company for the same amount, regardless of their roles or job responsibilities unless they are specifically excluded from coverage. This type of coverage is often purchased by large companies or companies with high turnover rates.

Scheduled coverage covers certain employees and can bond different employees for different amounts depending on the risks the company faces. For example, the head of accounting who has the authorization to transfer company funds may be bonded for a higher amount than a graphic designer who has no access to the company’s bank accounts. If an employee moves into a different position, he may need to be bonded again depending on his new responsibilities and the risks the company faces.

What are the typical exclusions for an employee dishonesty bond?

Employee dishonesty bonds typically include exclusions for:

• Theft by owners of the company, partners in a partnership, and members of limited liability companies
• Inventory shortages based on computations or profit and loss statements with no other evidence
• Future business income lost as a consequence of stolen property
• Restatement of a profit and loss statement
• Seizure or destruction of property by the government
• Independent contractors

How much does an employee dishonesty bond cost?

Pricing for an employee dishonesty bond generally depends on the type of company you run, number of employees, who your customers are, and your desired coverage amount. Employee dishonesty bonds are relatively inexpensive for the coverage they provide, with premiums ranging from 0.5% to 1% of the coverage you purchase.

What is a business service bond?

Many businesses require employees to go into the homes or offices of their clients to perform services. A business service bond protects this type of business against losses caused by the theft of a client’s money, personal belongings, equipment, and supplies committed by employees while on the customer’s premises. Types of businesses that might purchase a business service bond include:

• General contractors
• Commercial cleaning
• Security guard services
• Pest control services
• Pool cleaning
• Appliance repair services
• Painting services
• Home catering services
• Interior decorators
• Housekeeping services
• Home health care aides
• House sitters
• Dog sitters

Having this type of insurance can be a competitive advantage for your company as customers like to have peace of mind that they will be reimbursed if their property is stolen by one of your employees. It shows that you are a trustworthy business worth dealing with. Some customers may even require you to purchase a business service bond. Typically, the employee must be found at fault before the business service bond will pay the damages. Some states even require an indictment or conviction.

Example:

• You own a cleaning service that’s contracted to clean a large estate. One of the members of your cleaning crew finds some valuable jewelry in a dresser in the master bedroom and takes it with her. A business service bond will reimburse you for the cost of the jewelry, which you can use to pay back your customer.

How much does a business service bond cost?

Many factors influence the premium of the bond, and costs will generally depend on the amount your company is bonded for, the number of employees, your credit score, the financial health of your company, and your experience in business. The premium will usually be between 1-3% for business owners with good credit scores (>700).

What is an ERISA fidelity bond?

The Employee Retirement Income Security Act of 1974 (ERISA) was passed to protect employees participating in employer-sponsored retirement plans such as pension plans, 401(k)s, Employee Stock Ownership Plans (ESOP), and other retirement plans. ERISA sets up a number of rules and standards of conduct for employee retirement plans managed by private employers and the people who invest and manage plan assets.

ERISA requires the people who handle plan funds and other properties (called “plan officials”) to be covered by a Fidelity Bond, which is an insurance policy that protects employer-sponsored retirement plans from losses caused by acts of fraud and dishonesty by the plan’s managers.

Fraudulent or dishonest acts covered by ERISA fidelity bonds include:

• Theft
• Embezzlement
• Larceny
• Forgery
• Misappropriation
• Wrongful abstraction
• Wrongful conversion
• Willful misapplication

Example:

• The owner of a commercial cleaning service company transfers $30,000 worth of employees’ contributions to their 401(k) plans into her own bank account and uses it to pay the down payment on her new home. A Fidelity Bond will cover the losses from her embezzlement of funds.

Why do you need an ERISA fidelity bond?

ERISA was enacted into law to address serious public concerns that employer-sponsored retirement funds were being mishandled. The benefits of having Fidelity Bonds are clearly evident. It can be easy and extremely tempting for employers or other service providers who have access and authority over the plans to steal from them or commit fraud.

Especially when people are dealing with difficult economic times personally or struggling financially in their business, they may see plan funds as a way to cushion their finances. However, fraud or dishonesty can take on many forms aside from simply stealing assets from the retirement plans. It could involve charging excessive fees for 401(k) plans, reducing benefits without proper notice, making risky investments, taking kickbacks from fund administrators, and an array of other illicit activities.

How much coverage is required? What’s the maximum coverage?

ERISA requires each person handling the plan to be covered for at least 10% of the amount of funds he or she handles. The coverage can’t be less than $1,000 or more than $500,000, unless the plan includes stock options issued by the employer. Managers of plans that include securities issued by the employer can be covered up to $1,000,000.

Example:

• Your company’s retirement plan has funds totaling $750,000. The company owner and HR director are both fiduciaries of the plan with access to the plan funds and authority to disburse them. Both the owner and HR director must be bonded for at least 10% of the total fund amount or $75,000.

Final Word

Fidelity Bonds protect companies from losses caused by theft or fraud committed by employees. While an employee dishonesty bond protects the customer’s own property, a business service bond will cover customer property for businesses that go into their customers’ homes and offices. ERISA fidelity bonds will protect employees’ retirement plans from wrongdoing by the plan’s managers. Since employee theft and fraud is a widespread problem, Fidelity Bonds play an important role in helping businesses manage their risk.