Fidelity Bond Definition
What are Fidelity Bonds?
If someone were to ask you the question ‘What is a fidelity bond?’, you would be on solid ground if you replied that it’s a kind of insurance which a business might purchase to protect itself against any kind of losses as a result of employee actions. These actions might be fraudulent actions such as theft, forgery, or criminal trading, or some other type of dishonest act which ultimately causes a physical or financial setback to a company. A fidelity bond is sometimes referred to as an ‘honesty bond’ for reasons which should be clear, based on the reasons for purchase.
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How Fidelity Bonds Work
In practice, a these bonds works very much like an insurance policy. The owner of a business would purchase a bond from a brokerage, a bonding company, or an insurance company as a hedge against suffering significant losses due to fraudulent employee actions. Probably the most common kinds of actions which would be covered are illegal trading, or the theft of goods or other business properties. Contact NFP Surety for all your bonding needs! And let us provide your with a proper fidelity bond definition … Today! We bond in all states!
Since there are many different kinds of businesses, there would be a wide variety of criminal activities which could potentially be written into the terms of the bond. In order to be certain of coverage, the specific action would have to be included in the terms, so there is clear-cut responsibility on the part of the insurer to provide reimbursement for a loss.
If a company which brews and markets its own proprietary brand of beer had its brewing process documents stolen by an employee, it would then have recourse to make a claim against the bond it purchased as protection against such an action. The amount of the reimbursement would be pre-specified in the language of the bond, so that there is a ceiling on the monetary responsibility of the insuring company.
There are actually two fidelity bond types for situations like these, referred to as first-party and third-party fidelity. In the first case, a company would be protected against wrongful acts committed by actual employees of the company, whereas third-party bonds cover situations where wrongful acts are committed by individuals working for a company on a contract or temporary basis.
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Why you understand fidelity bond definition. And why bonding is important
As a business person, it is highly advisable that you purchase one or more of them for your business, especially if yours is the type of business which has been victimized in the past by employee theft or fraud. While your own business may not have suffered a loss in its history, you might still have the potential for being victimized. Instead of asking yourself, ‘What are fidelity bonds?’, you should be asking yourself, ‘Do I have any assets in my business that need to be protected?’. FYI- We only write with highly-rated carriers, such as The Hartford, Suretec Surety, Travelers, and more!
If you have any kind of assets which your business simply cannot do without, those assets should have the kind of protection afforded by a fidelity bond. In the event that you were to lose those indispensable assets permanently, you could then at least be compensated for your loss, so that you would have the means to re-acquire them and continue on.
When you do purchase your bond however, make sure the amount is commensurate with the actual value of the loss you will have suffered, so that you will have the financial wherewithal to replace it when compensated.
How Bonding can Help Businesses
Most small businesses operate on a fairly tight budget, and do not have immense cash reserves which can be accessed in the event of any financial setback, or loss of assets. Any small business which was forced to endure a significant loss of assets might well be thrown into bankruptcy, or at least into a financial situation which would make recovery difficult. That makes protection essential, so that the company could receive monetary compensation for any losses suffered, and it would not devastate the business.
In a sense, these kinds of bonds can protect employees too, since if a catastrophic financial loss were to be sustained, it’s possible that most or all employees would be out of a job. With that possibility minimized by the purchase of one or more bonds, there is less chance of a crushing blow being dealt to the company via theft or fraud, and somewhat greater job security for employees. If you need help to better understand these, or any other type, give us a call at (800) 863-3210. You won’t be disappointed.
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Types of Fidelity Bonds
After someone asks you, ‘What is a fidelity bond?’, they might well want to follow up with the natural question, ‘What types of fidelity bonds are there?’. There are not many different types of fidelity bonds, so they will be relatively easy to remember. The first of these is the ERISA bond, which is purchased to protect your employee retirement fund against embezzlement by the managing employee. I really want to rank for the term, fidelity bond definition, so I apologize if it reads awkwardly.
Business service bonds are those which protect you against any kind of damage or loss incurred when your employees enter the home of a private citizen to provide a business service. The amount of the claim would be paid to the business owner, who would then reimburse the client for damages.
The third type of fidelity is the honesty or dishonesty bond, which is the one most people think of in association with the term fidelity bond. Within this category though, there are two sub-types: blanket coverage and scheduled coverage. With blanket coverage, all employees in a company are covered by the same amount of insurance, whereas with scheduled coverage, only certain employees in high-risk positions are covered, and for amounts determined by the nature of their responsibilities, and their access to business-critical assets.
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