The Importance of Fidelity Bonds
When most business owners think of a company’s insurance needs they immediate thoughts go to general liability and auto liability policies to protect against bodily injury and property damage, workers’ compensation coverage to protect employees in the case of workplace injury and property insurance to protect business assets.
These policies are an excellent starting place, but a sound risk management plan contemplates every way in which a business may be harmed; not just the most common methods. Far too often when meeting with prospective clients, I find a distinct coverage gap stemming from potential dishonest acts of company employees. Very simply, this means that if an employee behaves dishonestly while representing a company, there is a very strong chance that the business may be left uninsured.
Company owners and Human Resource Managers work tirelessly to hire the very best associates possible to represent a business. No one ever intends to hire a dishonest employee, yet each year countless dollars are lost to these “bad apples” that make up a small portion of the workforce. Losses can stem from an employee directly stealing and/or damaging company assets, the loss of a customer’s property caused by the actions of an employee or the loss of employee assets managed by the employer-appointed trustees that administer a company-sponsored retirement plan.
A company can protect itself from the type of losses outlined above through the purchase of a fidelity bond. Fidelity bonds come in three distinct types; each providing coverage for a specific exposure.
- An “employee dishonesty” bond protects a business from incurring a financial loss due to fraudulent acts of employees or employee misconduct. These bonds protect against theft of company money or intentional damage to company property. Realistically, any business with employees really should consider the relatively inexpensive protection afforded by employee dishonesty coverage.
- A “business services bond” is designed to offer protection for a company’s customers caused by dishonest acts of employees while on a customer’s premises. These bonds, though not legally required, are an invaluable way to provide differentiation from competitors that do not offer this protection to their customers. Additionally, many insurance savvy individuals and business owners will not allow a vendor to work on their premises without first confirming that a business services bond is in place. Any business that conducts work at a customer’s home or business should give strong consideration to the purchase of a business services bond.
- Whereas the first two types of fidelity bonds can be considered an optional purchase as part of a business risk management program, an ERISA bond can be a requirement for certain companies. The Employee Retirement Income Security Act of 1974 requires fidelity bond coverage for the trustees of employer-sponsored benefit and/or pension plans. This legally required bond coverage must provide coverage for at least 10% of the total plan assets; up to a maximum of $500,000. This maximum limit increases to $1,000,000 if the plan holds employer securities. An ERISA bond protects the assets of employer-sponsored benefit plans from dishonest acts of those entrusted to administer the plan.
In summary, I strongly encourage all business owners to thoughtfully consider the implementation of a fidelity bond as part of the company’s risk management strategy. These bonds can not only protect a business from serious financial harm, but they also demonstrate to customers and employees that your business is doing everything possible to prevent claims from a dishonest employee. While we never like to think something one of our own employees can intentionally cause harm, a time-tested lesson really holds true when it comes to risk management: “It’s always better to be safe than sorry.”