A fidelity bond is a type of surety bond that protects a business against dishonest actions committed by its employees. The bond provides coverage to businesses for theft, forgery, fraud, and other dishonest actions that can lead to physical or monetary losses for the employer. The most common fidelity bonds are: ERISA bonds, business service bonds, janitorial service bonds and employee dishonesty bonds. Fidelity bonds are also commonly known as honesty bonds, employee dishonesty insurance (Australia) or fidelity guarantee insurance (United Kingdom).
A good example of a fidelity bond is the janitorial service bond. The janitorial service bond is a fidelity bond that janitorial companies will buy to guarantee financial compensation to their clients if one of their janitors were to commit a dishonest act, such as theft, while working on client property. In the event of a convicted crime, the surety company would reimburse the client for their loss, up to the bond amount purchased by the janitorial company. The price of fidelity bonds is usually a percentage, known as the premium rate, of the bond’s coverage amount. For a janitorial service bond specifically, the premium rate is between 1-3%, based on the applicant’s credit score and financial situation.
The fidelity bond involves three parties, just like any surety bond. It involves the principal, the obligee, and the surety. The principal is the business or individual that purchases the fidelity bond. The surety is the surety company that sells the bond. And lastly, the obligee is the party that would be compensated in the event of a claim. Depending on the type of fidelity bond bond, the obligee can vary. For an employee dishonesty bond, the obligee is the business since the business was stolen from. For a janitorial service bond, the obligee are clients of the business since the clients were the ones stolen from.
Going back to the janitorial service bond example, the principal would be the janitorial company, the obligee would be the clients of the janitorial company, and the surety is the surety company that issued the bond. The purchase of a surety bond is a two party agreement between the principal and the surety.
Lastly, there are two types of fidelity insurance policies: first-party and third-party fidelity bonds, First-party policies protect a from damages caused by an employee. Third-party policies protect the business from damages caused by a hired independent contractor.
There are three main types of fidelity bonds: business services bonds, employee dishonesty bonds, and ERISA bonds.
Business services bonds protect the business’s client when an employee physically steals or damages property while on the client’s premises. These bonds are used mostly by companies that send employees on client sites. Many janitorial service companies purchase business service bonds, so business service bonds are also sometimes colloquially known as janitorial service bonds in the cleaning industry. A variety of businesses purchase business service bonds, including but not limited to the following:
An employee dishonesty bond, also known as crime insurance, protects a business if one of their employees causes damage to the business through dishonest actions (i.e. fraud, embezzlement, or forging checks). These bonds are usually purchased by businesses whose employees handle cash, securities or other financial instruments. Common businesses that get employee dishonesty bonds include but not limited to the following:
ERISA stands for Employee Retirement Income Security Act of 1974, and an ERISA bond is a type of fidelity bond that protects the participants of employee benefit plans from dishonesty or fraud caused by those in charge of those plans. To break it down, let’s first start with what the ERISA is.
The Employee Retirement Income Security Act of 1974 is a set of regulations that governs private sector employee benefit plans and those who manage the assets within those plans. The individual that manages these assets is often called the plan administrator. Plan administrators are human resources professionals within an organization who are in charge of the organization’s employee benefit plan. Employee benefit plan is a blanket term for company plans that take investment from its employees. Examples of such plans include pension plans, defined contribution plans (i.e. 401K), and even health and life insurance plans.
So, how does this relate to fidelity bonds? Simply put, ERISA requires companies to purchase an ERISA fidelity bond to insure against any dishonest or fraudulent actions that could potentially be committed by the plan administrator. If an administrator were to commit a dishonest crime, the ERISA bond would cover and compensate the plan participants for losses and damages. ERISA bonds are generally required for almost all companies that provide employee benefits plans to its employees.
Here is a summary of the three types of fidelity bonds:
| Fidelity Bond | Bought By | Required |
| Business Services | Businesses that require employees to physically be at client’s property (i.e. janitorial services, plumbers, etc.) | No |
| Employee Dishonesty | Businesses that handle financial instruments or valuable items on their own premise (i.e. financial institutions, jewelry retail, etc.) | No |
| ERISA | Businesses that provide employee benefit plans | Yes |
The cost of a fidelity bond depends on the coverage amount, the value of items handled by a business (for business service and employee dishonesty bonds), the number of employees covered by the bond, and the type of bond.
For a business services bond, a credit check is required for obtaining a quote. The premium is typically 1-5% of the bond amount and is determined by the value of items that could be stolen. The higher the value of items that could be stolen, the higher the premium. The same relationship holds for the number of employees employed by the business. The more employees there are, the higher the premium. This is because having a large number of employees increases chances of theft and therefore claims on the bond. Most annual premiums start at about $125 per year for a $10,000 bond, $175 for a $25,000 bond, and $250 for a $50,000 bond. The premium that you will need to pay depends on your personal credit score and financial situation.
Employee dishonesty bonds are priced similarly to business services bonds. For a $5000 bond, our prices start at $100. For a $10,000 bond, our quotes start at $150. Prices are dependent on an applicant’s credit score, taken from a soft credit check that does not impact your credit.
ERISA bonds are quite different from other fidelity bonds. For ERISA bonds with bond amount less than $500,000, surety companies can usually issue the bond without a SSN based credit check. These bond costs range from 0.1-10% of the coverage amount.
There are two main reasons why fidelity bonds exist. The first is that they provide protection for businesses and their clients. With a fidelity bond in place, a business and their clients can operate with a peace of mind knowing that they are protected against theft and other dishonest acts. The second reason is that fidelity bonds serve as a great marketing tool for businesses to build trust with customers. Having a fidelity bond in place signals to customers that they will be covered if something were to go wrong. Sometimes, having a fidelity bond is a necessity to even be considered for a bond. For example, many larger cleaning contracts do not allow janitorial service companies to bid on the contract unless they have a proper janitorial service bond in place with the appropriate bond amount.
To make a claim on a fidelity bond, the business or individual that was stolen from would file a claim to the relevant surety company, and the surety company would investigate the claim. If the surety company finds that the claim is valid, then they would compensate the theft victim for their loss up to the stolen amount or the bond amount, whichever is lower. For business service bonds and ERISA bonds, the principal would have to repay the claim to the surety company, but for employee theft bonds, since the victim is the principal, no repayment to the surety is required.
Another interesting thing about fidelity bonds is that for business services bonds and employee dishonesty bonds, a conviction clause is typically required for claims. This means that a criminal conviction of the theft must be provided for the surety company to cover the damages. The conviction must be obtained through working with local law enforcement and provide evidence of the dishonest act. ERISA bonds, on the other hand, have no conviction clause, therefore a proof of conviction is not needed to make a claim. The surety company would independently investigate the claim.
The process for getting a fidelity is pretty straightforward. The basic steps are to determine the appropriate bond amount to get, fill out an application on a broker’s site, and once your application is approved, to make payment for the bond. Let’s go through the steps for each fidelity bond since there are nuances between each of them:
Step 1: Determine Bond Amount
This is typically determined by the value of potential items that could be stolen on client premises.
Step 2: Give information to surety broker so they can get you the best quotes
The price of a business service bond is based on an applicant’s credit score, so SSN is required for a soft credit check. The soft credit check does not impact your credit score.
Step 3: Pay for bond and receive bond via email
Make sure the bond lists the proper bond amount and your business name is written as the principal.
The steps are the same as a business service bond, except the bond amount is determined by the value of potential items that could be stolen on-site for a business (vs. client premise).
Step 1: Determine Bond Amount
The minimum bond amount for an ERISA bond must be at least 10% of the plan’s asset value. You can choose to increase bond amount to be greater than the minimum amount.
Step 2: Give information to surety broker so they can get you the best quotes
No credit check is required for ERISA bonds with bond amounts less than $500,000. A soft credit check is required for ERISA bonds with greater than $500,000 bond amount.
Step 3: Pay for bond and receive bond via email
For SuretyNow, ERISA bonds with a bond amount of less than $500,000 can be purchased instantly on our site. For bonds over $500,000, we will forward your application to our surety carriers and notify you upon approval. Once approved, we will send you a payment link to take your payment.
For business owners, getting a fidelity bond is an important risk management decision, as fidelity bonds provide coverage against employee theft and dishonest actions. When applying for a fidelity bond, it is important to know the difference between the different types of fidelity bonds you could buy. The three main types of fidelity bonds are business services bonds, employee dishonesty bonds, and ERISA bonds, each serving a different purpose with their own cost structure. We hope you found this article helpful. Please do not hesitate to reach out if you have any further questions about fidelity bonds. We’ve helped hundreds of businesses figure out their fidelity bond needs in the past.
