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 i) cause the company to sustain a loss and ii) obtain an improper financial benefit, either for themselves or another party. There are also many other coverage extensions available through the purchase of additional insuring agreements. These are common to most crime insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud, forgery, etc.) and are designed to further protect specific 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.
Commercial Crime Vs. Financial Institution Bonds
The fidelity bond marketplace is, generally speaking, split into two main type of policies; financial institution bonds (to protect financial institutions such as banks, stock brokers, insurance companies etc.) and commercial crime policies (non-financial institutions). Within each category there are different policy forms designed for specific types of institutions. These include:
- Financial Institution Bonds, Standard Form No. 14 for Brokers/Dealers
- Financial Institution Bonds, Standard Form No. 15 for Mortgage Bankers and Finance Companies
- Credit Union Blanket Bond, Standard Form No. 23 for Credit Unions
- Financial Institution Bonds, Standard Form No. 24 for Commercial Banks, Savings Banks and Savings and Loan Associations
- Financial Institution Bonds, Standard Form No. 25 for Insurance Companies
- Commercial Crime Policy
- Commercial Crime Policy for Public Entities
Fidelity insurers need to not only understand the threat posed to companies from traditional elements such as employee dishonesty, robbery or cheque forgery, they need to stay informed of emerging trends or evolving threat vectors.
Social Engineering Fraud
Also known as Business Email Compromise or Impersonation Fraud (and by a variety of other names), this fraud typically involves someone close to the insured company (an employee, an executive, a vendor or a client) being impersonated - often quite convincingly - and tricking the company into transferring funds to the fraudster. These funds are often then quickly transferred offshore making recovery very challenging. Despite the pervasiveness of this threat (the FBI estimates that since January 2015 over $3 billion have been lost by companies around the world to this scam), most traditional insurance policies do not cover this type of loss. Many policyholders have challenged insurance company's assertions that this is not a covered loss in court, however a string of recent North American cases support the insurers' positions, notably American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America, The Brick Warehouse LP v. Chubb Insurance Company of Canada, and Taylor & Lieberman v. Federal Insurance Company.
The industry has responded to these events by making an extension of coverage available but they are typically subject to additional premium, robust underwriting questions, and are often sublimited.
In Australia, this type of employer protection is usually called employee dishonesty insurance coverage. (Other names, such as "Fidelity Cover" may also be used by specific insurance agencies or brokers.)
In the United Kingdom, this type of employee dishonesty insurance is called fidelity guarantee insurance coverage.
In the United States of America, 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.
- "Standard Form No. 14 (Revised to May, 2011) - The Surety & Fidelity Association of America (SFAA)". www.surety.org. Retrieved 2017-09-18.
- "Standard Form No. 15 (Revised to May, 2011) - The Surety & Fidelity Association of America (SFAA)". www.surety.org. Retrieved 2017-09-18.[permanent dead link]
- "Standard Form No. 23 (Revised to May, 1950) - The Surety & Fidelity Association of America (SFAA)". www.surety.org. Retrieved 2017-09-18.
- "Standard Form No. 24 (Revised to May, 2011) - The Surety & Fidelity Association of America (SFAA)". www.surety.org. Retrieved 2017-09-18.
- "Standard Form No. 25 (Revised to May, 2011) - The Surety & Fidelity Association of America (SFAA)". www.surety.org. Retrieved 2017-09-18.
- "Business E-Mail Compromise". Federal Bureau of Investigation. Retrieved 2017-10-06.
- "American Tooling Center: U.S. District Court finds no Coverage for Social Engineering Fraud Loss under Crime Policy's Computer Fraud Insuring Agreement". FCL FIDELITY BLOG. 2017-08-10. Retrieved 2017-10-06.
- "The Brick: Alberta Court of Queen's Bench finds no Coverage for Social Engineering Fraud Loss under Crime Policy's Funds Transfer Fraud Insuring Agreement". FCL FIDELITY BLOG. 2017-07-13. Retrieved 2017-10-06.
- "Taylor & Lieberman: Ninth Circuit finds No Coverage under Crime Policy for Client Funds lost in Social Engineering Fraud". FCL FIDELITY BLOG. 2017-04-03. Retrieved 2017-10-06.
- Lemke and Lins, ERISA for Money Managers §§2:39 - 2:41 (Thomson West, 2013).