Understanding the Difference
Surety bonds and fidelity bonds are both tools that protect against financial loss, but they serve different purposes, involve different parties, and operate under distinct principles. Understanding the difference is essential for business owners, contractors, and professionals who may need one or both types to stay compliant or protect their operations.
What Is a Surety Bond?
A surety bond is a three-party agreement between:
- The principal – the person or business required to get the bond.
- The obligee – the entity (often a government agency or client) requiring the bond.
- The surety – the company guaranteeing the principal’s performance or compliance.
The surety bond ensures that the principal fulfills contractual or legal obligations. If the principal fails to meet those obligations, the obligee can make a claim against the bond. The surety pays valid claims but will seek reimbursement from the principal afterward.
Surety bonds are commonly required for:
- Contractor and construction licenses
- Auto dealer licenses
- Freight broker operations
- Notaries public
- Performance and payment contracts
These bonds are often mandatory under state or federal law and are designed to protect consumers, taxpayers, or project owners.
What Is a Fidelity Bond?
A fidelity bond functions more like an insurance policy. It protects a business or its clients from losses caused by employee dishonesty, theft, or fraud. Unlike surety bonds, fidelity bonds are two-party agreements between the insured business and the insurance company.
The insurer compensates the business directly if covered losses occur, and the insured does not repay the insurer after a claim. Fidelity bonds are especially common in industries where employees handle money, property, or sensitive information.
Common types of fidelity bonds include:
- Employee Dishonesty Bonds: Cover internal theft, forgery, or fraud.
- Business Service Bonds: Protect clients when employees work on their property.
- ERISA Bonds: Required under federal law for those who manage employee benefit plans.
Fidelity bonds are often optional but strongly recommended for businesses that want to safeguard against internal risk.
Key Differences Between Surety and Fidelity Bonds
Although the terms sound similar, the two bonds serve entirely different functions.
CategorySurety BondFidelity BondParties InvolvedThree: principal, obligee, suretyTwo: insured business and insurerWho Is ProtectedThe obligee (client or government)The employer or client of the businessPurposeGuarantees performance or complianceProtects against employee dishonesty or theftClaims ProcessPrincipal must reimburse surety for any paid claimsInsurer pays the loss; business is not required to repayRequired ByLaw, regulation, or contractVoluntarily purchased or required by ERISAExamplesContractor license, auto dealer, bid/performance bondsEmployee dishonesty, business service, ERISA bonds
This distinction shows that surety bonds protect others from your actions, while fidelity bonds protect you from your employees’ actions.
Who Needs a Surety Bond?
Surety bonds are typically required by government agencies, licensing boards, or project owners before a professional or company can begin operations.
You may need a surety bond if you are:
- A contractor applying for or renewing a state license
- An auto dealer obtaining a business license
- A freight broker or motor carrier filing federal paperwork
- A notary public operating under state law
These bonds help ensure compliance with laws, ethical business conduct, and fulfillment of financial or contractual responsibilities.
Who Needs a Fidelity Bond?
Businesses that employ workers who handle clients’ money, data, or property can benefit from fidelity bonds. They are often purchased by:
- Accounting and payroll firms
- Janitorial or cleaning services
- Financial institutions
- Nonprofits handling donor funds
- Retirement plan administrators (ERISA requirement)
While not always mandatory, fidelity bonds can serve as a financial safeguard and a trust signal to clients.
Cost Comparison
Surety Bonds: Premiums are typically a small percentage (1%–10%) of the total bond amount, depending on the applicant’s credit score, financial strength, and bond type. Higher credit scores and lower-risk industries generally result in lower rates.
Fidelity Bonds: Premiums are based on the number of employees, the coverage amount, and the type of risk being insured. Costs often range from 0.5%–3% of the coverage limit and are paid annually like a standard insurance policy.
The main difference is that surety bond pricing depends on the applicant’s creditworthiness, while fidelity bond pricing depends on the scope of coverage and internal risk factors.
Claims Process Differences
In a surety bond, if the bonded party fails to meet obligations, the obligee files a claim. The surety investigates and, if valid, compensates the obligee—then seeks repayment from the principal.
In a fidelity bond, if an employee steals or commits fraud, the business files a claim with the insurer. Once verified, the insurer pays the business directly for the covered loss. There’s no reimbursement obligation for the insured.
Similarities Between Surety and Fidelity Bonds
Despite their differences, both bond types share certain similarities:
- Both provide financial protection against specific risks.
- Both increase trust and credibility in the eyes of clients or regulators.
- Both may be required to secure licenses, contracts, or customers’ confidence.
- However, the protection each offers benefits different parties and addresses distinct forms of risk.
Choosing the Right Bond
- You need a surety bond if a government agency or client requires one as part of your license or contract.
- You need a fidelity bond if you want to protect your business from employee dishonesty or theft.
- Some businesses—like financial services or contracting firms—may need both for full protection and compliance.
When in doubt, review the specific wording of the bond requirement. If it mentions compliance or licensing, it’s likely a surety bond. If it covers employee dishonesty or theft, it’s a fidelity bond.
Key Takeaways
- Surety bonds guarantee compliance with laws and contracts; fidelity bonds protect against internal theft or fraud.
- Surety bonds involve three parties; fidelity bonds involve two.
- Surety bonds protect the public or obligee; fidelity bonds protect the business itself.
- Surety bond premiums depend on credit; fidelity bond premiums depend on coverage and employee risk.
- Both help businesses build trust, credibility, and financial protection.
