Buy Fidelity Bonds

Fidelity bonds are a type of insurance that protects an employer against financial losses caused by the dishonest actions of their employees.

These bonds provide coverage for losses that result from theft, embezzlement, or fraud committed by employees while they are performing their duties. The bond covers the amount of the loss, up to the limit of the bond, and is paid to the employer as compensation for their financial loss.

Fidelity bonds are commonly required for businesses that handle large amounts of cash or sensitive financial information, and are often a requirement for financial institutions.

The short answer is that Fidelity bonds and crime insurance are virtually the same thing. They protect the business or employer from crimes that were committed by employee or contractor.

Here's the biggest difference: Fidelity bonds are simply a type of crime insurance that protects businesses from specific fraudulent acts.

The average cost of a fidelity bond with a $1 million policy limit is just over $1000 annually, or less than $85 per month.

A fidelity bond with a limit of $100K costs about $250 per year, or less than $21 monthly.

Have you ever seen, "Licensed, Bonded and Insured" on a contractors ad, sign, card or truck? Well they are talking about fidelity bonds in part.

They are a necessary part of the insurance program of almost every business that wishes to be fully protected against loss.

Where burglary, robbery and theft policies protect against acts of criminals, fidelity bonds protect against the actions of those within an insured's organization who are in a position of trust, and who are often better situated to cause large-scale losses than outsiders.

Many businesses have comparatively little exposure to loss by criminal acts of outsiders, but all are exposed to loss by employee dishonesty. Each year, businesses in the United States suffer billions of dollars in losses due to theft from trusted employees.

Some of these losses are so substantial that the businesses are unable to continue in operation. The sad truth is that this coverage is often extremely underinsured because management cannot admit that a high-level trusted employee might betray them.

The fidelity bond covers more than just money. It covers theft of any kind of property, real and personal, including bullion and manuscripts, trees and shrubbery, automobiles, aircraft, boats and animals.

The insured is not required to own the property. The fidelity bond covers the loss of any property for which the insured has a financial interest or any property for which there is legal liability, and also for any property held in any capacity, whether or not there is legal liability for the property.

HAZARDS COVERED

Fidelity bonds cover all fraudulent or dishonest acts of employees. The insuring clause is very broad, and takes in almost every form of unlawful taking of property by an employee, whether it is technically a larceny or embezzlement under the laws of the state.

Some bonds specifically mention forgery, theft, wrongful abstraction, willful misapplication, and any act of fraud or dishonesty.

Such losses are covered whether the employee acts alone or in collusion with others. Also covered is any inventory shortage that the insured-employer can conclusively prove was due to fraud or dishonesty on the part of an employee or employees.

Such loss is no longer an inventory shortage but is actually an embezzlement loss. To prove "conclusively" that a loss of this kind is due to a dishonest employee is, of course, sometimes difficult. The intent of the coverage is to protect against loss through dishonesty and not loss through inventory shortage.

There must be dishonest intent on the employee's part. Unauthorized application of an employer's funds would not be covered unless the employee was consciously acting in a dishonest way.

Thus, if a cashier pays out money to a person who falsely represents himself as entitled to receive such money, or if an employee pays a bill that she was not authorized to pay, there is no bond coverage because the action wasn't due to an employee's dishonest act.

A fidelity bond will not pay for loss caused by an employee's mistake or lack of judgment if there is no intent on that employee's part to commit fraud.

The fraud or stealing may be committed by another but still be covered under the fidelity bond. If an employee aids someone outside the company in depriving the employer of money or property, the fidelity bond will cover.

As an example, a night watchperson might agree to leave a door open but not actually take part in the theft. The fidelity bond responds because the employee aided in the loss.

Because these types of losses are specifically excluded under the Commercial Property–Special Cause of Loss Form discussed in the Property topics the fidelity bond closes a major gap in the insured's protection.

There is no requirement in the fidelity bond that an employee personally profit from the dishonest act. This means that losses caused by an employee aiding in a dishonest act for the benefit of another or just taking action as a personal grudge against the employer are covered regardless of the monetary gain to the employee.

TYPE OF LOSSES COVERED

The fidelity bond pays only for direct losses. Indirect or consequential losses from interruption of business are not covered by the bond. As an example, if an employee steals a machine worth $1,000, the $1,000 loss is covered. However, if the employer must stop work for three days until the machine is replaced the $5,000 loss for lost production time is not covered.

An employer may choose to cover all employees or just a few. The restricted bonds may cover only specifically named employees or may cover only employees who occupy specifically named positions.

When a bond includes all employees of a risk, coverage is provided only for losses caused by employees who are in the regular employ of the insured; are compensated by salary, wages or commissions; and are subject to the direction of the insured.

The fidelity bond does not include as employees brokers, factors, commission merchants, consignees, contractors and other agents or representatives.

If the insured is a partnership, there is no coverage for the dishonesty of the partners because the partners are employers not employees. However, some insurance carriers will cover some partners who are more employees and less employers, such as in large law firms.

A corporation, by contrast, is a distinct legal entity; all of its officers are employees of the corporation, and thus a bond covering all employees of a corporation will protect against fraud committed by an officer.

Specifically excluded, however, are directors or trustees of the insured corporation unless they also are officers or employees in some other capacity. Under fidelity bonds that cover all employees of a firm, it is possible to specifically exclude officers of a corporation.

Cancellation of Coverage on Dishonest Employees

Any employee who is discovered to have committed any fraudulent act is immediately excluded under the bond from coverage on future acts. If the bond covers only one employee and that employee is discovered to have committed fraudulent acts, the entire bond is terminated.

If more than one employee is covered, or if the bond covers all employees, the bond continues in full force on the other employees, but not on the one whose dishonest act was discovered.

The commission of the dishonest act does not exclude the employee from coverage until it is discovered by an insured.

Coverage ceases whether or not the discovered loss is reported to the surety. This means that if an employer wishes to spare an employee from embarrassment and does not report the loss, any subsequent larcenies committed by that employee would not be covered because the employer was aware of that employee's dishonesty.

Absence of Coverage on Employee Previously Cancelled

The bond often also excludes from coverage any employee on whom coverage was cancelled and not reinstated by any fidelity insurer, whether because the employee was discovered to have committed a dishonest act, or for other reasons, unless the present surety specifically agrees in writing to include the employee.

Because most of the losses that fall under fidelity bonds are committed in stealth, it can readily be seen that many of these dishonest acts may not be discovered for some time after they are committed.

It is important, therefore, to understand that a loss, in order to be covered under a fidelity bond, must satisfy two elements of time: It must have been caused during certain periods and also must be discovered within certain time limits, as discussed below:

When Loss Must Occur:

1. While the bond is in force OR
2. While a prior bond was in force, subject to certain conditions (to be discussed under Superseded Suretyship).

When Loss Must Be Discovered:

1. While the bond is in force OR
2. After cancellation of the bond, within the specific discovery period granted by the particular bond (discussed below).

Discovery Period (Cut-Off Period)

Most fidelity bonds provide an additional period after cancellation for the insured to discover losses caused while the bond was in force. This additional time for discovering losses is known as the discovery period, or cut-off period, and varies from six months to three years, depending on the particular bond.

Discovery Period

While a bond is in force, losses do not have to be discovered within any given time after they occur. Fidelity bonds are continuous until cancelled, and any loss that occurs while the bond is in force and is discovered while the bond is in force will be paid, no matter how long the loss took to come to light.

The discovery period (also known as a cut-off period) begins to run only after a bond is cancelled.

The discovery period does not extend the bond to cover any losses except those that occurred when the bond was in force.

(This rule is substantially modified under most bonds that replace others, as will be discussed later under Superseded Suretyship; but the basic coverage of the bond applies only to losses actually sustained during the term of the bond.) The bond does not apply to losses caused before the bond took effect or after it has been cancelled.

The discovery period also comes into play when a bond is reduced in amount. During the discovery period, the employer can recover the old amount of insurance. After the discovery period has run, he or she can recover no more than the reduced penalty.

Superseded Suretyship (Indemnity Against Loss Under Prior Bond)

As was pointed out above, the basic insuring clause of a fidelity bond covers only those losses that are sustained while the bond is in force. Most bond forms now include a superseded suretyship clause (indemnity against loss under prior bond clause).

Under this clause, the bond picks up losses that were sustained under a prior bond and would have been paid by the earlier bond except for the fact that they were not discovered within the prior bond's discovery period. Superseded suretyship thus provides a bridge of continuity of coverage from the old bond to the new one replacing it.

The replacing (superseding) bond agrees to pay such losses, subject to certain limits.

The superseding suretyship clause of a bond will go into operation only if the replacing bond is substituted for the previous bond on the very same day the prior bond was cancelled. There must be no break in the continuity of the two bonds, not even for one day; otherwise there is no superseding suretyship.

The replacing bond that picks up losses under its superseding suretyship clause is liable only for the amount that the former bond would have paid, or the amount that it would itself pay for the loss if it had been effective when the loss occurred, whichever is less.

The provision in the superseded suretyship clause, limiting liability to the lesser of the two amounts available under either bond, will apply also when the form of coverage provided under one bond is more limited than under the other.

Penalty of Bond

The maximum liability of the surety for any single loss under a bond is referred to as the penalty of the bond, which is equivalent to the amount of insurance under an insurance policy.

Amount Of Loss

Dishonest employees almost always commit a series of thefts or embezzlements before their acts are detected. It is important to understand that all the separate acts of fraud are combined at the point of discovery and are considered to be one loss.

The penalty of the bond is the maximum amount available for any single loss, regardless of the number of individual fraudulent acts actually committed before detection.

How Many Losses?

Inventory Shortage Exclusion Loss based entirely on shortage of inventory is not covered under a fidelity bond. The employer must be able to prove that the loss was caused by the dishonesty of an employee.

Non-accumulation Of Liability

The penalty of a fidelity bond is not increased, regardless of the number of years the bond has been in force. This means that if an employee was stealing for four years, the maximum payout remains that bond penalty for a single year.

Salvage

Most bonds contain a full salvage clause. The insured who sustains a loss that exceeds the amount of coverage under the bond is entitled to any recoveries (salvage) up to the point where it is fully reimbursed for the loss. The balance of the salvage, after the insured has been made whole, goes to the surety company.

Some bonds contain a pro rata salvage clause under the terms of which the surety and the employer (obligee) share in any salvage in the proportion of their respective shares in the loss.

Other Insurance

If the insured carries any other insurance that covers a loss recoverable under a fidelity bond, the bond acts as excess insurance over such other insurance and will pay only after the limit of liability under the other policies has been exhausted, and then only for the excess over such amount.

The term of a fidelity bond is continuous. The policy contains no expiration date and remains in force until formally cancelled. Premiums for the bond are figured for one year or for three years, and the employer is required to pay further premiums on the premium anniversary of the date of the bond.

Fidelity bonds attach at 12:01 a.m. If employee dishonesty coverage is purchased on an insurance policy, the term is normally limited to one year.

Cancellation

While many surety bonds may not be cancelled, fidelity bonds may be cancelled by either the surety or the employer. If the surety wishes to cancel a fidelity bond, it usually must give at least 15 days' notice to the insured.

Coverage on any employee who is discovered to have committed a fraud terminates immediately upon discovery of the loss as discussed earlier.

Rates for fidelity bonds depend on the number of employees and the amount of coverage applicable to each employee, the type of position held by the bonded employee, and the type of bond.

Rates for fidelity bonds also depend on the class of business. Most classes of business fall within one group; certain classes are surcharged because of poor experience, e.g., hotels, chain stores, amusement enterprises, etc. Others receive a credit, e.g., hospitals, colleges, libraries, charitable institutions.

As the amount of the penalty under a fidelity bond is increased, the basic rate per $1,000 of coverage decreases.

Term Rates

While the fidelity bond usually is continuous, premiums are shown for a three-year period. The three-year premium is three times the annual, if paid in advance. The three-year premium also may be paid in three annual installments for an additional 5% carrying charge. The installments are calculated at 35% of the three-year premium.

Deductibles

Deductibles may be included in all fidelity bonds. The deductible may apply to all employees or only to certain classes of employees.

Thus, the insured may provide that the deductible will apply only to Class B employees, or to all special Class A employees, or to all employees in a particular position.

It cannot be applied only to individuals in a class unless the entire class is included.

Experience Rating

Schedule bonds with a total liability of $100,000 or more, and all blanket fidelity bonds, regardless of size, are experience rated.