# Fidelity Bonds Explained: Types, Benefits, and Uses

> **Definition**
>
> A fidelity bond is business insurance protecting employers against financial losses from employee fraud or dishonesty.

## What Is a Fidelity Bond?

A fidelity bond is a form of [business insurance](https://www.investopedia.com/terms/b/business-insurance.asp) that offers an employer protection against employee actions like fraud, theft, and forgery. Also known as an honesty bond, this form of insurance can protect against monetary or physical losses. There are generally two types: first-party fidelity bonds, which protect businesses from wrongful employee actions, and third-party fidelity bonds, which protect them from actions taken by contracted employees. Fidelity bonds are an important part of a risk management strategy.

In Australia, a fidelity bond is called employee dishonesty insurance, and in the United Kingdom, it's called fidelity guarantee insurance.

### Key Takeaways

*   Fidelity bonds are a type of business insurance that protects against employee fraud and theft.
*   They are a key component of a company's risk management strategy.
*   Fidelity bonds are divided into first-party and third-party types based on who commits the wrongful act.
*   Common types include business services bonds, employee dishonesty bonds, and ERISA bonds.
*   They are particularly important for banks and financial institutions to maintain financial security.

## The Role of Fidelity Bonds in Business Protection

If a company has employees who commit fraudulent acts, the company itself may be exposed to legal or financial penalty in addition to the individual employee or employees who committed the act. As a result, companies are at risk of being exposed to such penalties, especially firms with a large number of employees.

Fidelity bonds cover firms for such damages. Despite the name, fidelity bonds are actually [insurance](https://www.investopedia.com/terms/i/insurance.asp) policies. Fidelity bonds are usually classified as first-party or third-party:

*   First-party fidelity bonds protect businesses from employees' wrongful acts.
*   Third-party fidelity bonds shield companies from the wrongful acts of contracted individuals.  
    

> **Important**
>
> A fidelity bond should not be confused with a regular bond. It is an insurance policy that is neither tradable nor can accrue interest.

Insurance companies, banks, and brokerage firms often hold fidelity bonds, required as protection proportional to their net capital. When employed by a bank, the bond is called a [banker's blanket bond (BBB)](https://www.investopedia.com/terms/b/bankers-blanket-bond.asp) and provides security against an employee's criminal acts. Among the possible forms of loss that a fidelity bond covers include fraudulent trading, theft, and forgery.

## Benefits and Applications of Fidelity Bonds

Fidelity bonds can be considered part of a business's approach to [enterprise risk management](https://www.investopedia.com/terms/e/enterprise-risk-management.asp). These insurance policies function as a sort of protection should the company suffer losses caused by fraudulent or criminal employee actions taken against the company or its clientele.

This can include cash theft from the business, as well as if the employee steals from a customer of the company. Acts of forgery by an employee that affect the business may also be covered by this type of policy. Robbery and burglary of the company safe, destruction of company property, and the illicit transfer of funds are covered by fidelity bonds, too.

## Exploring Different Types of Fidelity Bond

Fidelity bonds are broken down into various types, each covering specific things. The most common forms of fidelity bond are:

*   **Business services bonds**: These products, also called business bonds or janitorial service bonds, are generally the most common type of fidelity bond. Their job is to protect clients when employees visit their premises. For example, should a company send an employee to a customer’s home and that staff member steals a computer, the bond would reimburse the client for the loss.
*   **Employee dishonesty bonds**: These bonds protect companies and their clients in the event that an employee misuses Social Security numbers, credit card numbers, or other financial or personal data.
*   **ERISA bonds**: The [Employee Retirement Income Security Act (ERISA)](https://www.investopedia.com/terms/e/erisa.asp) of 1974 demands that trustees of pension plans have fidelity bond coverage equal to at least 10% of the total plan’s assets. This rule was put in place to protect plan beneficiaries from theft or other inappropriate actions orchestrated by those responsible for managing 401(k)s and other pension plans.  
    

> **Tip**
>
> Some states, like Alaska, Michigan, and Texas, use fidelity bonds to encourage hiring of high-risk applicants. With these fidelity bonds, the employer would be reimbursed should the employee behave dishonestly.

## How Does a Fidelity Bond Work?

Fidelity bonds are insurance products that offer employers protection against losses caused by employees’ fraudulent or dishonest actions. Should an event covered by the policy transpire, the company would file a [claim](https://www.investopedia.com/terms/i/insurance_claim.asp) and get reimbursed according to what it agreed to with the insurer.

## What are Examples of Fidelity Bonds?

The most common type of fidelity bond is the so-called business services bond, which is designed to protect against losses when an employee is on a customer’s premises. For example, if a window repair worker is sent to a home that was damaged by a storm and steals jewelry from the residence, the company may have exposure concerning their employee’s actions. Likewise, if a dog sitter were to use their access to a client’s home to steal money, or if a home health provider took clothes or a laptop from a client, then a fidelity bond tailored for such circumstances could provide the company with the coverage it needs.

## What are Two Main Types of Fidelity Bonds?

Two popular types of fidelity bonds are business services bonds, which are specifically designed to protect clients when employees enter their home or place of business, and employee dishonesty bonds, which protect companies from financial loss should an employee or group of employees engage in fraudulent activities. Another common type of fidelity bond is the ERISA (Employee Retirement Income Security Act) bond, which protects retirement-plan beneficiaries should trustees steal from them.

## The Bottom Line

Fidelity bonds are a type of insurance that is essential for a company's risk management strategy, as they offer financial protection from financial and legal penalties resulting from employee misconduct. There are several types of fidelity bonds, including business services bonds, employee dishonesty bonds, and ERISA bonds.

Fidelity bonds are not tradable securities, but they are vital insurance products for companies, especially in sectors like banking and brokerage, where they serve as a security mandate.

> **Article Sources**
>
> 1.  Insureon. “[Fidelity Bonds for Technology Businesses and IT Professionals](https://www.insureon.com/technology-business-insurance/fidelity-bonds).”
>     
> 2.  Financial Industry Regulatory Authority. “[SEA Rule 15c3-1 and Related Interpretations: 15c3-1 Net Capital Requirements for Brokers or Dealers.](https://www.finra.org/rules-guidance/guidance/interpretations-financial-operational-rules/sea-rule-15c3-1-and-related-interpretations)”
>     
> 3.  U.S. Department of Labor. “[Protect Your Employee Benefit Plan with an ERISA Fidelity Bond](https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/protect-your-employee-benefit-plan-with-an-erisa-fidelity-bond.pdf).”
>     
> 4.  Nationwide. “[Fidelity Bonds](https://www.nationwide.com/business/insurance/bonds/pages/fidelity).”
>     
> 5.  State of Alaska, Department of Labor and Workforce Development. “[Fidelity Bonding Program](https://labor.alaska.gov/bonding/).”
>     
> 6.  State of Michigan, Labor and Economic Opportunity. “[Fidelity Bonding Program](https://www.michigan.gov/leo/bureaus-agencies/wd/programs-services/fidelity-bonding-program).”
>     
> 7.  Texas Workforce Commission. “[Fidelity Bonding](https://www.twc.texas.gov/jobseekers/fidelity-bonding).”