Fidelity bonds: Overview, definition, and example
What is a fidelity bond?
A fidelity bond is a type of insurance that protects businesses from financial losses caused by employee dishonesty, such as fraud, theft, or embezzlement. Unlike traditional insurance, which covers external risks, fidelity bonds specifically cover losses resulting from employees' misconduct.
For example, if an employee steals money from a company’s accounts, a fidelity bond can help reimburse the business for the lost funds. These bonds are commonly used in industries where employees handle sensitive financial transactions or valuable assets.
Why is a fidelity bond important?
A fidelity bond provides businesses with financial protection and peace of mind. Even with careful hiring and oversight, fraud or theft can still occur. Having a fidelity bond ensures that a company isn’t left to absorb the full financial impact of an employee’s misconduct.
Some industries, such as financial services and government contracting, may require businesses to carry fidelity bonds to protect clients and stakeholders. This added layer of security can also enhance a company’s reputation by showing customers and partners that their assets are protected.
Understanding fidelity bonds through an example
Imagine a small accounting firm that employs a bookkeeper to manage client funds. If the bookkeeper secretly transfers money into their personal account and disappears, the firm could suffer significant financial losses. A fidelity bond would allow the firm to recover the stolen money and continue operating without severe financial hardship.
In another example, a home cleaning service hires employees who work in clients’ homes. If an employee steals valuable items from a client, a fidelity bond could cover the losses, protecting both the company and its customers from financial harm.
An example of a fidelity bond clause
Here’s how a fidelity bond requirement might appear in a contract:
“The Contractor shall maintain a fidelity bond in the amount of [Insert Amount] to protect against losses resulting from employee fraud, dishonesty, or theft. The bond shall remain in effect for the duration of this Agreement.”
Conclusion
Fidelity bonds help businesses mitigate financial risks associated with employee dishonesty, providing compensation for losses due to fraud, theft, or embezzlement. They are especially valuable for companies handling financial transactions, sensitive information, or client property.By including a fidelity bond requirement in contracts, businesses can ensure added protection, comply with industry standards, and build trust with clients and stakeholders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.