Fidelity issues will drive you bald and nuts! Fidelity bonds
What is a Fidelity Bond?
A fidelity bond is a protection for company or organization against losses brought about by its employees' fraudulent and dishonest activities.
This type of bond contract provide protection against financial or physical losses or damages.
What is a fidelity bond?
Fidelity Bond Policy
A fidelity bond can be defined as a type of business insurance that protects an enterprise or institution from damages resulting from its workers’ fraudulent or deceptive activities such as stealing money from clients through lies. Fidelity bonds are essential, especially for big organizations. Although fraudulent activities within an organization are not common, they are not rare either. A fidelity bond protects businesses from both physical and economic damages caused by the employees. The damages may include a situation where a worker steals the firm’s money or a problem of property fire damages caused intentionally by a welder.
Understanding Fidelity bonds
Apart from the losses to an organization caused by the individual employees who engage in fraudulent acts, organizations can also be subjected to additional legal or financial penalties. These penalties put such organizations at very high risks of losses, especially for big companies. If a company is covered from such damages through a fidelity bond, the chance of losses is significantly reduced. Hence, the company does not suffer a significant financial setback. Banks, insurance companies, and brokerage firms are primary examples of companies that take fidelity bonds.
Fidelity bonds cover losses such as thievery, counterfeiting, and fraudulent trading. Thievery is where an employee physically steals money or business assets. Counterfeiting occurs when a worker fake signatures or bring fake money to the business and exchange it with genuine cash. On the other hand, fraudulent trading is where an employee does an illegal transaction that leads to damages or losses. Fidelity bonds can protect businesses from these dishonest acts as you never know what type of people you will be working with, which can happen to anyone.
Therefore, it provides an extra layer of protection for both you and your business.
What kinds of loss can fidelity bonds cover?
A fidelity bond is a form of crime insurance that covers a wide range of losses. Fidelity bonds provide coverage to damages or losses that happen to an organization or its clients due to criminal activities. These losses or damages include financial theft from the institution itself or its clients. That is where an employee steals money from the institution without anyone’s knowledge or lies to a client who pays more money for service, and then he pockets the extra cash.
Fidelity bonds also compensate for damages arising from employees’ forgeries, destruction of the business’s assets, robbery in the organization, and unlawful financial transfers. An example of illegal financial transfers is when an employee receives a large amount of cash for a service, yet the business only deals with cheques. Also, a worker may conduct a transaction at the wrong time, say late into the night when the company is not in operation.
Who is required to hold fidelity bonds, and when is the right time to apply for them?
An employer or an organization is required to hold a fidelity bond when it employs high-risk workers. High-risk workers refer to individuals who can benefit the growth of an organization or economy but somehow have a negative record. Examples of high-risk workers may include- individuals with a police record, those with a negative credit record,- people who were has a history with addictions, and- among others who may have a negative past that makes it difficult to trust them.
As an employer, you are required to apply for a fidelity bond or ask your employees to purchase the policy. If you are self-employed, you can not apply for fidelity bonds.
What are first-party and third-party fidelity bonds?
Fidelity bonds are classified into two categories which include first-party bonds and third-party bonds. First-party bonds are more common compared to third-party bonds. First-party bonds usually offer protection to companies against their employees or customers who intentionally engage in fraudulent activities and hurt the business. The employees or customers of a company can engage in fraudulent activities such as theft, fraud, forgery, and many more malicious acts.
Third-party bonds, on the other hand, offer companies protection against fraudulent activities committed by the people working for those companies on a contract basis, such as consultants and independent contractors. It is a requirement that the individuals or firms working for a company on a contract basis have a third-party bond.
Are fidelity bonds a type of insurance policy?
Despite their name “fidelity bonds,” they are a form of an insurance policy. That means that a fidelity bond, like any other insurance coverage, cannot grow value through interests and cannot be transacted like a conventional bond. A fidelity bond is also known by different names, such as ‘Employee Dishonesty Insurance,’ showing that it is just like any other insurance policy.
What are some kinds of fidelity bonds?
In addition to first-party and third-party fidelity bonds, there is also an ERISA. ERISA or Employee Retirement Income Security Act requires the businesses offering retirement plans to their employees take ERISA fidelity bonds. These bonds cover losses that may occur when an employee misappropriates retirement funds or assets hence protecting other employees from dishonesty. The individual who has access to retirement assets is bonded to at least 10% of the value of the retirement assets he has access to.
Why would a company prefer fidelity bonds?
Are there any advantages? Fidelity bonds are highly essential since an organization can remain in business without sinking into debts when employees deliberately engage in fraudulent activities. Fidelity bonds usually work as a risk management strategy for the company hence preventing losses. Fidelity bonds protect a company against deliberately deceitful employees or clients who access the company’s products and services using dishonest means. Fidelity bonds also usually cover the damages that arise when employees of a company act in ways that hurt the clients financially, hence offering protection to clients. Additionally, a fidelity bond is an effective risk management strategy since it covers all the damages arising from theft, fraud, or forgery.
Are fidelity bonds expensive?
Fidelity bonds are relatively affordable for an organization. The cost of the fidelity bond you purchase as an employer will depend on a couple of factors such as your business type, the types of customers you serve, the amount of coverage required, and the number of employees in your firm. The cost of a fidelity bond ranges between 0.5% and 1% of the coverage purchased. For example, if you are buying $10,000 coverage, then 0.5% and 1% of that would be between $500 and $1000.
What is the process for claiming fidelity bond insurance?
When loss like theft of money by an employee occurs, it is crucial to report the claim to the insurance provider as soon as possible. You don’t have to wait until you get all the details for you to report. However, it is vital to ensure that your claim is not an exclusion in the policy. Once the claim is made, the insurer usually sends a team to do investigations and find all the necessary facts. If the claim is valid, the claim process continues, and then you are compensated.