You may have heard people talk about “getting bonded,” but what does that mean? Bonding is a protection, a form of insurance, and fidelity bonding protects customers and others from harmful, unethical, or otherwise poor business processes.
Definition and Examples of Fidelity Bonds
A fidelity bond is a type of insurance that protects someone from losses caused by someone else. It’s like a guarantee that someone will do what they said they would do. Fidelity bonds insure against theft, forgery, fraud, larceny, or embezzlement. They don’t insure against poor work, injuries, or accidents.
Fidelity bonds usually involve three parties:
- The person buying the bond
- The person or entity that provides the bond (the insurance company)
- The person whose work is being insured
For example, a service business could buy a fidelity bond from a bonding company to insure against losses due to an employee’s dishonesty.
Don’t confuse fidelity bonds with bonds in the investment marketplace. Bonds sold on stock exchanges are debts, similar to IOUs from a business to bondholders.
Types of Fidelity Bonds
ERISA bonds are a special kind of fidelity bond created by the Employee Retirement Income Security Act (ERISA). ERISA requires that employee benefit and retirement plans must be covered by a fidelity bond. In the same way as a general fidelity bond would protect a company, an ERISA bond protects the plan from losses from fraud or dishonesty by plan administrators and others handling plan funds.
Similar to ERISA bonds, nonprofit organization bonds are used by nonprofit organizations to protect themselves against dishonest employees.
Fidelity Bonds vs. Surety Bonds
Surety bonds are similar to fidelity bonds, but they are a promise to be liable for someone else’s debt, default, or failure. A surety bond includes three parties:
- The surety party, which guarantees the performance or obligation of
- The principal, the second party, to
- The obligee or owner, the third party who buys the bond.
Some types of surety bonds are court bonds, notary bonds, license and permit bonds, and public official bonds.
How Does a Fidelity Bond Work?
Fidelity bonds are insurance products, sold by insurance companies, and the fidelity bond process is regulated by state and local municipalities. To find out the cost of a bond or to buy one, contact any licensed insurance agent in your state.
The cost of bonding depends on the amount of coverage you want. It also depends on your state’s minimum requirements for your type of business, the risk of loss, and your occupation.
According to Insureon, a business insurance company, the median premium cost for small business fidelity bond coverage is $1,055 a year.
Here are some examples of state regulations on fidelity bonds:
Nevada regulates fidelity bonds for credit unions. Surety (insurance) companies must be state-approved by getting a certificate of authority before selling fidelity bonds to credit unions. The state also makes sure that the coverage is large enough to “provide proper protection” for the credit union’s customers.
Maryland’s state regulations include licensing for security systems agencies and technicians. To obtain a license, agency applicants must have a fidelity bond of at least $50,000 to cover their staff who will provide security system services.
Why Get Bonded?
Some states and municipalities require bonding for specific occupations. For example, notaries are required to post surety bonds in 31 states. The bond doesn't protect the notary public; it protects the person who receives the notary’s services.
Other types of bonds, like the ERISA bonds described above, are required by government agencies for individuals who handle funds or other property.
Many service businesses get bonded because they can limit their liability for employee actions by purchasing this specific form of insurance. Buying a fidelity bond is also a good way to assure your customers that you have their interests in mind, since they know they’re protected from losses.
- Fidelity bonds are a type of insurance that protects customers from losses due to fraud, dishonesty, or illegal actions by employees and others in positions of trust.
- Fidelity bonds involve an insurance company, a purchaser, and individuals whose actions may cause losses.
- States and municipalities regulate the sale of fidelity bonds, stipulating minimum coverage and requiring people in certain occupations to be bonded.
- Costs for fidelity bonds vary depending on state minimum requirements and the type of business or occupation.