What is a Fidelity Bond? Definition
A fidelity bond is defined as a form of insurance that protects policyholders from possible losses they may incur as a result of fraudulent and/or illegal acts by individuals or organizations.
It is typically put in to place to protect an employer from the dishonest acts of its employees.
The type of loss may be either monetary or physical.
Protection against High Risk Employee
Fidelity bonds offer protection against not only dishonest employees but also those considered high-risk employees.
An example of a high-risk employee is one that might have a criminal background, served dishonorably in the military, or be in financial ruin.
A person that works in a bank or brokerage house with access to large amounts of money may also be considered high-risk.
Types of Fidelity Bonds
There are two types of fidelity bonds:
1. First-party bonds
2. Third-party bonds
First-party fidelity bonds protect a business from the intentional wrongful acts of its employees.
These acts usually take the form of forgery, theft, embezzlement, or fraud.
Third-party fidelity bonds protect a business from fraud, forgery, theft, or embezzlement conducted by people working on a contract basis in the role of consultant, independent contractor, or freelancer.
Insurance companies, cash carriers, security firms, and brokerage firms are expressly required to carry protection proportional to their net capital.
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Depending on the amount of property at risk, fidelity bonds can have a value of $5,000 to $25,000. There are no deductible amounts involved with fidelity bonds and they are valid for only six months.
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Guidelines on Fidelity Bonds
The insurance company issuing the fidelity bond may set certain guidelines to be followed in the insured firm’s hiring practices.
The protection continues only as long as the duties of the covered employee remain the same.
There may, however, be clauses written in to the policy that provides coverage should an employee’s job function change.
How to Obtain a Fidelity Bond
Obtaining a fidelity bond is not difficult. Any business that withholds federal taxes from its employees can purchase a fidelity bond.
The employer will submit the request for coverage on company letterhead to the insurance company issuing the bond.
The request should include information about the individual, the duties to be performed, and a start date. The insurance company will send the individual an authorization and proof of coverage.
Fidelity Bonds vs. Other Types of Insurance
Fidelity bonds are insurance policies.
They are not financial instruments like savings bonds and do not earn interest nor are they worth a monetary face-value amount.
They protect against criminal acts alone and should not be confused with property insurance or malpractice insurance.
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