Fidelity & ERISA Bonds

While employees are often necessary for operating your business, they’re also potential risks. A fidelity bond is a type of surety bond that protects employers from losses caused by dishonest actions by their employees, such as theft, fraud, embezzlement, and destruction of property.

The cost of a fidelity bond is often determined by your industry and the number of employees covered under the bond. Beyond cost, this fidelity bond guide will also cover:

• Definition & Example

• How It Works

• Cost & Requirements

• Types of Fidelity Bonds

• Where to Find & How to Apply

Fidelity Bond Definition and Example

Employers use surety bonds to protect their businesses against dishonest acts by their employees, such as theft, fraud, and embezzlement. If the business suffers any losses due to their employees, the fidelity bond will reimburse the employer up to a certain amount. There are several types of fidelity bonds based on the type of protections you want (more on that later). ERISA bonds, for example, are often used by financial institutions that manage retirement plans. 

What is an example of a fidelity bond?

Let’s say you offer home cleaning services and you hire several employees to scale your business. Later, one of your clients accused your employee of stealing money and jewelry from their bedroom. You discover the allegations are true. Fortunately, your fidelity bond would cover any financial loss to your business from this claim.

How Does a Fidelity Bond Work?

Fidelity bonds function a little differently from most surety bonds. A performance bond on a construction project, for example, protects the client against incomplete work by the bondholder (the contractor completing the construction). A fidelity bond is internal, protecting the bondholder from bad practices by their employees.

As mentioned, fidelity bonds help employers hedge risk against losses incurred by dishonest employees. These losses are often related to claims involving:

Since embezzlement, fraud, and theft are common claims, an employer will usually acquire a fidelity bond whenever hiring employees that will handle cash. For this reason, insurance companies, banks, investment brokers, and other financial institutions often secure fidelity bonds to protect their interests. A fidelity bond may also be purchased when employees have  access to the client’s personal property (e.g., home cleaning services). 

• Destruction of company property

• Embezzlement

• Theft, burglary, or robbery

• Forgery

• Fraud

What happens when a claim is filed?

If a claim is filed against your bond for wrongdoing by your employee and is proved true, then you will receive financial recompense for any related losses. In many cases, the accused employee must face trial before a judge. Some fidelity bonds contain a “conviction clause.” Even if you’re certain the employee committed some wrongdoing, your surety will not pay out until the employee has been convicted in court. While this is a delay for the employee, it protects employees from false accusations.

Fidelity Bond Cost & Requirements

There are several types of fidelity bonds — costs often vary by the amount of coverage you need and how many employees you have. But some bonds may be priced based on the value of total assets under management. Financial institutions, for example, may be charged 1% to 10% of how much money they manage. Therefore, the financial institution may need to pay $10,000 to $100,000 to obtain a fidelity bond.

Premiums are often based on the creditworthiness of the employer, as well as their business financials. Generally, good-credit applicants will qualify for lower premiums.

Not all businesses will require a fidelity bond to operate, but it may be mandated in select industries. Any company that handles money involved in retirement plans, for example, must obtain an ERISA fidelity bond. 

Types of Fidelity Bonds

Under the fidelity bond umbrella, there are several types of bonds that protect the employer against dishonest employee actions. Here are some common types:

• Employee dishonesty bond: A general type of fidelity bond that protects employers against losses from employee dishonesty, including embezzlement, theft and burglary.

• Business service bond: This bond protects your business when an employee is found guilty of stealing from your client’s personal property.

• Janitorial & cleaning bond: A specific type of fidelity bond for business owners that offer janitorial and cleaning services.

• Financial institution bond: This bond protects banks, insurance companies, and other financial companies against dishonest employee actions.

• ERISA bond: Any institution that handles funds related to an employee benefit plan, such as a 401(k) plan, must obtain an ERISA bond.

How Do I Get a Fidelity Bond?

Fidelity bonds are often available through national and local insurance carriers, but you may find some companies that specialize solely in surety bonds. Fortunately, buying a surety bond is often a more straightforward process than getting insurance. Many applications are done online and you can have your bond in minutes by following these steps:

1. Submit an application that includes your personal and business information (e.g., business name, address, number of employees, industry).

2. Receive a premium quote based on your qualifications.

3. Purchase and receive your bond (or refuse and shop around).

Fidelity Bond FAQs

What does a fidelity bond cover?

Fidelity bonds cover employers against dishonest employee actions, including the destruction of company property, embezzlement, theft, burglary, forgery, and fraud. A fidelity bond will cover the employer from any related losses if claims of dishonest employee actions are proved true.

How long does a fidelity bond last?

Terms on fidelity bonds typically last one year. Employers must pay another premium to renew their bond for another term.

Can I get a bond with bad credit?

Yes, bad credit applicants can still get bonded but may face higher premiums. Worldwide Insurance, Inc. works with thousands of employers — even those with low credit — to help them meet their bonding requirements.

What type of surety bond do I need?

Visit our list of bonds by state to get a closer idea of your bonding requirements. To learn more about surety bonds in general, check out our free surety bond guide.

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