Fidelity Bonds

Fidelity bonds, or employee protection bonds, are insurance policies that offer business owners protection against losses resulting from the fraudulent acts of their employees. If a bondholder suffers damages from acts such as theft and larceny committed by employees covered by these bonds, s/he can exercise the option of utilizing the bond’s amount to compensate for the damages. Fidelity bonds are ideal for corporations employing one million people or more.

Fidelity bonds, or employee protection bonds, are insurance policies that offer business owners protection against losses resulting from the fraudulent acts of their employees. If a bondholder suffers damages from acts such as theft and larceny committed by employees covered by these bonds, s/he can exercise the option of utilizing the bond’s amount to compensate for the damages. Fidelity bonds are ideal for corporations employing one million people or more.

Fidelity bonds offer complete insurance coverage without any deductible. The insurance coverage is usually for a period of six months and could range from $5,000 to $25,000.

What do Fidelity Bonds Generally Cover?

The fraudulent acts covered by fidelity bonds are:

• Employee theft
• Credit card fraud
• Fund transfer fraud
• Fake currency
• Data thefts
• Forgery
• Money order fraud
• Computer fraud

However, fidelity bonds do not cover:

• Liabilities because of incompetent workers, accidents and injuries during work
• Employee lawsuits

How do Fidelity Bonds Work?

An employer can claim damages if s/he can prove that the dishonest or disloyal act of an employee was committed with “manifest intent.” Although the meaning of “manifest intent” is ambiguous, it is crucial to prove this intent to claim the damages. To minimize this ambiguity, the courts interpret ‘manifest intent’ in two different ways:

• Specific intent to inflict loss: Employee dishonesty yields coverage when the act of dishonesty does not benefit the employer directly.
• Substantial certainty: When an employee is fully aware or is ‘substantially certain’ that his/her conduct will lead to a significant loss to the company.

Drawbacks of Fidelity Bonds

The shortcomings of fidelity bonds are:

• They are characterized by a low premium-to-payout ratio.
• Bond policies are ambiguous and complex. The terms and scope of coverage varies with each policy.
• Compensation can reduce if the time lag between the bond purchase and the actual payments is large.
• Bond payouts can not be accounted for while calculating an institution’s worth.
• Litigation complexities can delay the payment of large bond claims.