Fidelity Bond

What is a fidelity bond?

A fidelity bond is an insurance policy that protects a business against financial loss caused by employee dishonesty, fraud, theft, forgery, or other wrongful acts. Although called a “bond,” it is not a tradable security and does not accrue interest. In some countries it is known by other names (for example, “employee dishonesty insurance” in Australia and “fidelity guarantee insurance” in the U.K.).

Key takeaways

• Fidelity bonds protect employers (and sometimes clients) from losses caused by dishonest or fraudulent acts by employees or contracted workers.
• They are an element of enterprise risk management and are especially common in financial services.
• Main categories include first-party and third-party bonds, plus specialized forms such as business services, employee dishonesty, and ERISA bonds.
• ERISA rules require fidelity coverage for pension-plan trustees in the U.S.

How fidelity bonds work

When a covered loss occurs, the employer files a claim with the insurer. If the event falls within the policy terms, the insurer reimburses the company up to the policy limit. Coverage terms, exclusions, and limits vary by policy and insurer.

Main types of fidelity bonds

• First-party fidelity bonds: Protect the employer against wrongful acts committed by the company’s own employees.
• Third-party fidelity bonds: Protect the employer from dishonest acts by contracted or temporary personnel.
• Business services bonds (also called janitorial or service bonds): Reimburse clients if an employee who visits client premises steals or damages property.
• Employee dishonesty bonds: Cover misuse of customer or company financial information, identity theft, or similar fraud by employees.
• ERISA bonds: Required under the Employee Retirement Income Security Act for individuals who manage employee benefit plans; they must generally equal at least 10% of plan assets (subject to statutory minimums and caps).

Who needs fidelity bonds

Fidelity bonds are useful for any business that handles cash, valuables, sensitive customer data, or has employees working at client locations. They are commonly required or strongly recommended for:
* Banks, brokerages, and other financial institutions
Businesses that send employees into customer homes or stores (cleaning, repairs, health aides)
Employers who manage retirement or pension plans

Benefits and common applications

• Financial protection against employee theft, fraud, forgery, and illicit transfer of funds.
• Protection for clients when employees access customer premises or personal property.
• Risk mitigation for trustees and administrators of retirement plans.
• Can be used by some state programs to encourage hiring of high-risk applicants by reimbursing employers for dishonest acts (programs exist in states such as Alaska, Michigan, and Texas).

Examples

• A home-repair technician steals a laptop while working at a customer’s house; a business services bond would reimburse the client.
• An employee misuses customers’ credit-card numbers or Social Security numbers; an employee dishonesty bond could cover resulting losses.
• A pension-plan trustee embezzles plan assets; an ERISA bond protects beneficiaries.

Important notes

• Fidelity bonds are insurance policies, not financial securities.
• Coverage details, limits, and exclusions differ by insurer and policy—review terms carefully.
• Some industries or regulators may require specific fidelity coverage (for example, banker’s blanket bonds for banks).

Conclusion

Fidelity bonds are a practical risk-management tool that protect businesses and their clients from the financial consequences of employee dishonesty and fraud. Selecting the right type and coverage level depends on the nature of a business’s operations, the risks involved, and any regulatory requirements.