A dishonest employee has the potential to wreak havoc on your business. To shield your company from financial losses, you may want to secure insurance coverage or a fidelity bond. While these two options sound somewhat similar, there are significant differences between a fidelity bond vs. a crime policy.
What are fidelity bonds?
Investopedia defines a fidelity bond as a type of business insurance that protects an employer against losses caused by a worker’s fraudulent or dishonest actions. Although it’s called a bond, it’s actually a form of insurance.
Unlike some other types of bonds, a fidelity bond cannot be traded and does not accrue interest. There are different types of fidelity bonds, including business service bonds (which provide protection from theft of a customer’s property) and employee dishonesty bonds (which provide protection from misuse of financial or personal data).
What are crime insurance policies?
Crime insurance helps to protect companies from business-related crime. According to the International Risk Management Institute (IRMI), commercial crime insurance policies can typically provide coverage for several types of crime. This can include employee dishonesty, along with other criminal acts like forgery, computer fraud, funds transfer fraud, counterfeit money and kidnap, ransom and extortion.
Do you need a fidelity bond or a crime policy?
Although fidelity bonds and crime policies seem similar and may provide some overlapping benefits, particularly for employee dishonesty, you should not ignore the differences. Depending on your needs, one may be more appropriate than the other. Below are a few questions to consider as you contemplate your commercial coverage options.
Question #1: Do you need coverage for employee dishonesty?
A fidelity bond may make sense if employee dishonesty is the primary type of coverage you need. For example, let’s say you operate a housekeeping business that requires sending employees to clients’ houses, where they are often unsupervised and have access to valuables. If an employee steals a piece of jewelry or other high-value item, your company could be held liable for the loss. A business services bond offers protection from this type of occurrence.
Employers may also want to secure bonds for workers who have access to financial information or company funds. The fidelity bond can provide coverage if an employee steals money or property.
Question #2: Do you need business insurance for third-party crimes?
Fidelity bonds provide coverage for acts of employee dishonesty, but not for crimes committed by third parties. If you want coverage for both employee-committed crimes and third-party crimes, you likely need a commercial crime insurance policy.
Although coverage varies depending on the terms and conditions of the policy, commercial crime insurance often covers theft, forgery, receipt of counterfeit funds and social engineering fraud. For example, if your business accepts cash from the public and you later learn that some of the funds are counterfeit, your policy can help offset this loss. Likewise, if one of your employees is tricked into making a fraudulent wire transfer in a social engineering scheme, your policy may provide coverage if social engineering coverage was purchased.
Question #3: What limits do you need?
As the three examples below illustrate, commercial crime can be costly.
- The Fort Worth Star-Telegram says an employee stole more than $3 million from a Texas employer over the course of a decade, forcing the company to cut bonuses and lay off workers.
- According to USA Today, an employee at a Home Depot in California stole approximately $1.2 million in cash by taking money out of the register over a prolonged period of time.
- The U.S. Department of Justice says a woman embezzled more than $3.5 million from her employer in Georgia between 2015 and 2020.
Fidelity bonds may have lower coverage limits compared to commercial crime insurance policies, which could prove to be an issue if your business faces a situation similar to the three examples. To gain additional protection, companies may select a commercial crime insurance policy with a high limit.
Question #4: Are you required to purchase a fidelity bond?
You may think that crime insurance policies sound like the better option because they provide broader coverage terms and higher limits. However, you may still be required to secure a fidelity bond for an employee due to regulations or contracts with clients and partners.
Question #5: Do you need an ERISA fidelity bond?
If your employees handle retirement plan funds, an ERISA fidelity bond will likely be required.
According to the U.S. Department of Labor, the Employee Retirement Income Security Act (ERISA) requires fidelity bond coverage for people who handle plan funds and other property. This includes anyone who makes physical contact with cash, checks or plan property, as well as anyone with the power to transfer plan funds, negotiate plan property, direct disbursements, sign checks or provide supervisory or decision-making responsibility for activities that require bonding.
Question #6: Are you hiring a high-risk employee?
Most employers try to avoid hiring employees with backgrounds that make them high-risk. For example, many employers run background checks and ask job applicants whether they’ve ever been convicted of a crime, and some may even avoid hiring individuals with poor credit histories. These policies may be intended to reduce the company’s risk, but can also make it difficult for certain individuals to obtain employment.
To address this issue, some states promote fidelity bonding for high-risk employees. This gives employees who might otherwise be denied job opportunities a chance to prove themselves while protecting the employers from financial losses.
Securing Your Coverage
Criminal acts can be devastating. To reduce your exposures and help prevent financial losses, you need to avoid gaps in your insurance coverage.
An insurance broker at Higginbotham can help you assess your coverage needs and determine which policies are the most appropriate for your business, whether that’s a fidelity bond, crime insurance policy or another form of coverage. Get in touch with a member of our team today.