Should Your Small Business Clients Have A Fidelity Bond?

Fidelity bonds are a type of surety bonds which are usually not required by law (with the exception of ERISA bonds) but are very useful for a certain class of businesses. These include businesses such as:

• janitorial and cleaning services
• moving companies
• mowing businesses
• those employing contractors’ services and
• any business who has access to their clients’ property

They are also relevant to those businesses whose employees have access to the business’s finances.

Unlike other bonds, a fidelity bond look more like insurance than a surety bond. Depending on the case, it can both protect the business obtaining the bond and its clients from the business’s employees.

Conversely, surety bonds typically serve as protection for a business’s clients in cases where the business commits acts of fraud or dishonesty, or does not comply with contract conditions. Furthermore, surety bonds are almost always required by state law while fidelity bonds are optional.

The protection that fidelity bonds offer to business owners and their clients applies to cases when employees commit acts of theft or fraud, damage a client’s property or otherwise cause harm. These are so-called first-party fidelity bonds. Third-party fidelity bonds extend the same type of protection to businesses who suffer harm by contractors they have employed.

Types of Fidelity Bonds

Depending on the type of protection and coverage they offer, fidelity bonds can be divided into four different categories.

1. Business Services Bond
These bonds are obtained by businesses whose employees have access to a client’s property. They guarantee that if an employee causes harm to the property or commits theft, the client and business will be compensated. Businesses will often use the fact that they are bonded in this way to advertise themselves as reliable and safe to their clients.

2. Employee Dishonesty Bond
Sometimes also called commercial crime bonds, these bonds apply to cases when a business wants to protect itself from fraudulent actions on part of their employees. This could mean forgery, theft or embezzlement.
They are particularly relevant to instances when employees have access to a business’s finances, handle money at a cash register or are responsible for accounting. Non-profit and faith-based organizations may sometimes also make use of these bonds.

3. Financial Institution Bond
These bonds are specifically devised for financial institutions such as banks, stockbrokers or insurance companies as a means of protection against theft-related exposures by employees. This could, again, mean theft, forgery or fraud but also robbery, burglary, as well as theft through computer systems or in day-to-day operations.

4. ERISA Bond
ERISA bonds are the only type of fidelity bond that are obligatory but only in cases when employers offer employee benefit plans. ERISA bonds are named after the Employee Retirement Income Security Act and protect the employees who participate in those benefit plans from fraud and mishandling of their benefits.

Why Should You Get a Fidelity Bond?

While fidelity bonds are mostly optional, they remain a meaningful investment for those businesses who want to secure an additional form of protection for themselves and their clients.

Another good reason for a business to obtain such a bond is the fact that many clients are wary when employees work in or around their property. By getting bonded, businesses can effectively market themselves as reliable and trustworthy companies who keep their clients’ interests in mind.

Last but not least, under the Federal Bonding Program, employers can obtain free fidelity bonds for the first six months when hiring an ‘at-risk’ employee. This program is meant to stimulate businesses to provide work to ‘hard-to-place’ job seekers and help people with past offenses or little work history get back on the job market.

In all these cases, fidelity bonds can serve an important and necessary function and confer many benefits to business owners.

————–

Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping business owners get bonded and start their business.