While every small business owner would love to put their full faith and trust in their employees, sometimes you have to be realistic. Human nature can be fickle. People make mistakes. Accidents happen. And unfortunately, sometimes the very people you employ commit crimes while they’re on the job.
In fact, this phenomenon has become somewhat of a Hollywood trope—the accountant who embezzles money, the employee that steals from the cash register, the stockbroker who’s insider trading (Michael Douglas in Wall Street, anyone?). People enjoy these narratives because they’re based on real life circumstances. But why are we talking about employee-turned-criminals?
Because fidelity bond insurance is a type of policy that protects a small business if their employees act criminally. Curious as to what it covers and why it’s important? Awesome. Let’s dive in.
Fidelity bond insurance: what is it exactly?
Also known as an employee dishonesty bond, fidelity bonds protect a business when an employee commits a crime. Typically, fidelity bond insurance will cover:
Forgery – If your employee, god forbid, commits fraud or steals, then your business could be in hot water.
Illegal Electronic money transfer – If a dishonest employee decides to transfer funds to someone they’re not supposed to (themself, for instance), then your company is at risk. This becomes even more devastating if you work in finance and have access to your clients’ bank accounts.
Illegal data access – This is when an employee has access to sensitive or confidential data and accesses it unlawfully (typically using it for illegal reasons).
Identity theft – If a company handles lots of credit cards, then you have access to personal data. An employee could then commit identity theft and use this person’s personal information illegally.
All of the above circumstances can lead to problems for a small business. For instance, if a client loses money due to the misconduct of your employee, they might file a lawsuit and demand compensation. This will likely lose your business money.
Additionally, if the consequence has nothing to do with a client (or customer) and the business loses money, well, you’ve lost money.
Fidelity bond insurance (or fidelity bonds) cover any losses that result from the dishonest or criminal actions of your employees.
Crime and fidelity insurance
When it comes to fidelity, the word bond and insurance are sometimes used interchangeably. Why? Because they’re both forms of insurance, working to protect the company should their employees act criminally.
Fidelity bond – This is (typically) a one-time purchase between a company and a bond provider. If things go wrong, the bond provider will cover the damages up to the price of the bond itself.
Fidelity bond insurance – This is (typically) a policy that a company pays for annually. Should something go wrong, the insurer will pay for the damages up to the policy limit.
Despite the differences, both work to achieve the same purpose—to protect a business from the financial loss incurred by the criminal actions of their employee.
Types of fidelity bonds
There are (generally) three different types of fidelity bonds. An insurer who offers fidelity bond insurance will often break their policies into three categories:
- Employee dishonesty bond
- Business service bond
- ERISA fidelity bond
#1: Employee dishonesty bond
An employee dishonesty bond is a policy that helps protect businesses in the case that their employee’s dishonesty results in financial loss (either because a client is affected and demands compensation, or the business takes a direct hit).
This can include unlawful actions like:
- Embezzling funds
Example: You run a small boutique clothing store. Unfortunately, the new clerk you hired ends up stealing $3000 from the cash register. They’re caught, charged, and found guilty, yet the money has already been spent. An employee dishonesty bond would (typically) cover the full $3000.
#2: Business service bond
A business service bond is taken out because a company sends employees into clients’ homes and offices. Why? Because it protects both the company and client should equipment, money, personal belongings, or supplies get stolen by the employee.
The bond will then help cover reimbursements, either paying the client directly or paying the insured. Businesses that opt in to a business service bond include but are not limited to:
- Cleaning services
- Security companies
- Pool cleaners
- Pest control companies
- Interior decorators
- Dog sitters
- House sitters
Example:You own a pool cleaning service and one of your technicians visits the property twice a month to service the hardware. Should they see a certain valuable item and decide to steal it, then this type of fidelity bond would help reimburse the cost of the item (so the financial loss is mitigated by either the insured or the client).
#3: ERISA fidelity bond
In 1974, the US Government passed the Employee Retirement Income Security Act (ERISA)1. Why? Because it protected employer-provided retirement initiatives. This includes 401(k)s, ESOPs (Employee Stock Ownership Plans), and more. Within ERISA, there are certain rules a private employer must follow when they’re setting up these retirement plans and investing their employees’ assets.
ERISA requires those who oversee retirement funds to purchase an ERISA fidelity bond, which protects the employee if the person managing their accounts acts dishonestly. Within this context, these acts include but are not limited to:
- Embezzling Funds
- Unfaithful conversation
Example: The CEO of a private family office ends up taking out $10,000 from an employee’s 401k, transferring it directly into their own bank account. The CEO spends it immediately. An ERISA fidelity bond would then pay back the employee what they lost.
Fidelity bond insurance: Do you need it?
Fidelity bond insurance protects businesses when their employee is dishonest or criminal. Should their actions result in financial loss for the company, this type of policy will help mitigate costs (if not take care of them completely). And, in some cases, a fidelity bond insurance policy is required in order to do business.
Is one of your employees in a position to commit a crime that could greatly affect the business? If so, you might want to consider fidelity bond insurance. For the needs common to nearly every business—liability insurance—consider Thimble.
Protecting your business with Thimble
While fidelity bond insurance protects you against your employees’ criminal actions, are you covered in the case of accidents that could occur to a third party? Here, we offer on-demand general liability insurance and professional liability insurance policies.
Our general liability policies help protect against third-party claims of bodily injury and property damage. On the other hand, our professional liability policies help protect you in the case that a client claims you’ve been negligent, losing them money due to your services.
By downloading our Thimble mobile app or clicking “Get a quote,” in under a minute you can go from having zero coverage to having a Certificate of Insurance. Should you need to add Additional Insureds, it’s free. Need more COIs? Also free.
Our mission is to make every part of insurance radically simple—from learning about the coverage you need to ensuring you’re covered for liability.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.