In our prior post on bonds we mentioned the fact that bonds are three party contracts involving a principal, a surety and an obligee. The principal is someone who has a legal or contractual obligation to another, the obligee, and that obligation is guaranteed by a third party, the surety, which is usually an insurance company. Fidelity bonds are the exception in that they are two party contracts and most resemble the insurance products with which most of us are familiar.
Fidelity bonds protect a company against theft from their employees. Pretty simple and straightforward. In the event an employee steals money and/or materials from their employer, the fidelity bond responds. The bonds are priced based on the limit of coverage chosen, the number of employees at the time of application and the amount of the deductible chosen. The underwriting is based on an application and possibly a supplemental questionnaire concerning your accounting system and internal controls.
Our agency has a few fidelity bonds that are a stand-alone bond, but today most fidelity coverage is written in conjunction with your commercial insurance. Several years ago, the insurance industry recognized that fidelity coverage is more similar to a standard insurance product than a bond, and it is now offered as a part of a crime policy available to a company alongside their general liability, workers’ comp, automobile and property. In either situation, the underwriting information needed is similar: a completed application and information on internal controls.
Fidelity coverage is usually an optional or voluntary coverage that a business owner might choose based on his or her own appetite for risk. However, there is one instance in which fidelity coverage is required by law. The Employee Retirement Income Security Act of 1974 (ERISA) requires that employee benefit plans be protected against fraud or theft by plan administrators and corporate officers who may have access to plan assets. The named insured on the bond is the benefit plan and the coverage amount must be at least 10% of the total amount of assets in the plan.
If you have any questions about this article, or wonder if this is a coverage you might need, please don’t hesitate to let us know.