Small businesses always look to hire the best employees. But no matter how carefully you screen workers, it is possible to end up with a bad apple or two.
In a worst-case scenario, untrustworthy workers can engage in unethical behaviors that cost your business or your clients money. You can cover such losses by purchasing a fidelity bond.
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What Is a Fidelity Bond?
Fidelity bonds—also known as “employee dishonesty insurance”—is a type of small business insurance that offers companies a way to cover themselves against financial losses if an employee does something to harm the company or a client.
The risk of employees engaging in dishonest or fraudulent behavior may be greater than you realize. Occupational fraud (crimes against the business by employees) had a higher median loss for small businesses ($150,000) compared to larger businesses ($138,000), according to a 2022 report from the Association of Certified Fraud Examiners.
Why Are Fidelity Bonds Used?
Fidelity bonds cover your business against fraudulent and dishonest acts by employees that cause financial harm.
Examples of situations in which a fidelity bond might help help a business include:
- Embezzlement
- Employee theft of property
- Forgery
- Illegal electronic funds transfer
- Misappropriation
- Willful misapplication
What a Fidelity Bond Is Not
A fidelity bond doesn’t provide comprehensive small business insurance coverage. Fidelity bonds don’t help the employee. These bonds strictly cover the employer.
Fidelity bonds aren’t commercial property insurance. Commercial property insurance covers your company’s physical assets from problems such as fires, burst pipes, theft and vandalism. That’s not covered by a fidelity board.
A fidelity bond is also not a surety bond. While a fidelity bond involves two parties, a surety bond is a contract involving three parties, such as a business, insurer and the customer requiring the bond that guarantees the business will fulfill the terms of the bond. A surety bond covers your business for claims of incomplete and shoddy work, as well as theft and fraud.
Types of Fidelity Bonds
The right fidelity bond for you depends on your business.
How Does a Fidelity Bond Work?
A fidelity bond covers your business for the types of fraudulent employee actions that are detailed in the terms of the bond, such as employee dishonesty. The fidelity bond should clearly spell out how much reimbursement would be provided after such fraudulent behavior occurs and the company makes a claim against the bond.
With fidelity bonds, you can cover specific employees or job positions with a schedule fidelity bond. The other option is to cover all employees with a blanket bond. A blanket bond offers the same amount of coverage for all employees. Schedule bonds provide specific coverage for each job position or individual employee listed in the policy.
When filing a fidelity bond claim, follow the rules set by the company that sold you the bond. As a general rule, you will likely be asked to explain what happened and why you’re filing a claim. You likely will be asked to furnish important documentation that supports the claim, such as a police report.
A claims adjustor likely will be assigned to the case and will ask you for any additional information that is required.
How Much Do Fidelity Bonds Cost?
Small businesses pay a median fidelity bond premium of $88 per month or $1,055 per year, according to Insureon.
Among Insureon customers:
- 21% of small businesses pay less than $50 a month or $600 a year for a fidelity bond.
- 42% pay between $50 a month or $600 a year and $100 a month or $1,200 a year.
- 37% pay more than $100 a month or $1,200 a year.
The cost of a fidelity bond is mostly determined by your policy limit. A more expensive policy limit yields a higher price. The amount of sensitive information that your company handles and how many employees have access to that information also impacts the cost of a fidelity bond.
Fidelity bond policy limits vary widely. There are policies with limits as low as $5,000 and there are policies with limits as high as $10 million. According to Insureon, 56% of customers choose fidelity bonds with a $1 million limit.
Median Fidelity Bond Costs by Policy Limits
Choosing a Deductible for a Fidelity Bond
A deductible is the amount deducted from a claim payment. The deductible you choose influences your costs.
Deductibles on fidelity bonds can be as high as $150,000, but more common deductibles are $10,000, $25,000 and $50,000.
Choosing a higher deductible typically saves money when purchasing your fidelity bond. Each business must weigh these savings against the risk of having a lower payout if you need to file a claim.
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Does Your Business Need a Fidelity Bond?
Examples of when you may need a fidelity bond include:
- A business might consider purchasing a fidelity bond if the company has employees who regularly handle cash or other expensive assets.
- Someone who runs a dog-sitting or janitorial services company might want a business service bond, which can cover clients if one of your employees steals from them.
- A nonprofit or accounting company might consider purchasing a standard employee dishonesty bond, which covers a business if an employee steals from the company.
- An ERISA bond benefits businesses with private sector employee benefit plans in the event that fraud or dishonesty creates a loss.
There are also situations when you might be required to purchase a fidelity bond. For example, some states require janitorial service providers to purchase fidelity bonds. Notary publics typically are often required to purchase notary bonds as well.
There are also situations in which your clients may require you to have a fidelity bond. For example, if you have a consulting firm, your client contract may need a fidelity bond to help cover theft, fraud, electronic funds transfers and unlawful data access.
How To Get a Fidelity Bond
A company interested in a fidelity bond purchases the bond from a provider, which might include:
- Bonding companies
- Brokerages
- Insurance companies
Insurance companies that offer fidelity bonds include:
- Auto-Owners Insurance. Offers employee dishonesty bonds and ERISA bonds.
- Colonial Bonds & Insurance. Offers ERISA fidelity, employee dishonesty, janitorial and homes service, and service provider fidelity bonds.
- Nationwide. Sells business services bonds, standard employee dishonesty bonds and ERISA bonds.
- State Farm. Sells both surety bonds and a wide range of fidelity bonds from ERISA bonds to business services bonds, and condo and homeowners association bonds.
- The Hartford. Offers ERISA fidelity bonds that insure your business against losses from an employee plan tied to theft and fraud.
- Travelers. Sells ERISA fidelity insurance and fidelity and crime insurance, which covers employee dishonesty, credit card forgery, destruction of property, and computer fraud and theft.
- Zurich North America. Sells ERISA fidelity bonds.
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