A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
While called bonds, these obligations to protect an employer from employee-dishonesty losses are really insurance policies. These insurance policies protect from losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss. There are also many other forms of crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud, forgery, etc.) to protect company assets.
First-Party Vs. Third-Party Fidelity Bonds
There are two types of fidelity bonds: first-party and third-party. First-party fidelity bonds protect businesses against intentionally wrongful acts (fraud, theft, forgery, etc.) committed by employees of that business. Third-party fidelity bonds protect businesses against intentionally wrongful acts committed by people working for them on a contract basis (e.g., consultants or independent contractors).
In business partnerships, it is the responsibility of the business working as a contractor or subcontractor to carry third-party fidelity bond coverage, though it is typically the other party who requests or requires such coverage. In many cases, businesses in finance or banking require their contractors to carry third-party fidelity bond coverage to prevent losses from theft.
In Australia, this type of employer protection is called employee dishonesty insurance coverage.
In the United Kingdom, this type of employee dishonesty insurance is called fidelity guarantee insurance coverage.
In the United States various service providers to pension plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) are required to obtain and maintain fidelity bond coverage in prescribed amounts.
- Lemke and Lins, ERISA for Money Managers §§2:39 - 2:41 (Thomson West, 2013).