What is the difference between a fidelity bond and a crime insurance policy? In a nutshell, a fidelity bond is pretty much the same as crime insurance. However, there are different types of crime insurance coverage that I am going to highlight in this post.
More often than not, the scope of the crime insurance coverage depends on the industry you work in and how exactly you would like to protect your business. When looking at fidelity bonds or crime insurance, there are a few things to keep in mind as you and your insurance agent decide which crime insurance coverage is best for you.
What Is A Fidelity Bond?
Despite its name, a fidelity bond is not a bond that you can trade or benefit from its accrued interest. This is just an insurance policy. It is also known as an “honesty bond.”
A fidelity bond is a type of insurance that protects you from fraudulent acts of third parties, including employee dishonesty. Companies purchase fidelity bonds to protect themselves from losses caused by employees’ misdeeds.
Companies with employees may be exposed to legal risks if an employee commits a fraudulent act. As a result, the companies at fault may face severe financial penalties. Fidelity bonds are insurance policies that cover firms for such damages.
Fidelity bonds are typically held by insurance brokers, banks, and realtors. These types of businesses are specifically required to carry protection proportional to their net capital. Among the possible forms of loss, a fidelity bond covers losses due to fraudulent trading, theft, and forgery.
Types of Fidelity Bonds
Depending on the specific protection that they provide, fidelity bonds are designated as either first-party or third-party. First-party fidelity bonds protect companies from claims stemming from wrongful acts committed by their employees.
Third-party fidelity bonds protect companies from similar acts by professionals hired on a contractual basis. There are three main types of fidelity bonds: Business Service Bonds, Standard Employee Dishonesty Bonds, and ERISA Bonds.
Business Service Bonds
Business services bonds protect businesses from claims resulting from the loss of a customer’s money, equipment, supplies, and personal belongings. Business service bonds cover losses due to dishonest acts of employees while on the customer’s premises.
These acts may include credit card theft or misuse. In addition to protection, this type of fidelity bond is great for differentiating your business’ insurance portfolio and gives your small business an edge over competitors who aren’t bonded for fidelity.
Standard Business Employee Bonds
A standard employee dishonesty bond protects your business from financial loss due to fraudulent activities of an employee or group of employees. The loss could result from employee theft of money or other valuables. This type of bond is a great solution for nonprofits and licensed professionals like dentists and physicians.
The Employee Retirement Income Security Act (ERISA) of 1974 mandates that trustees of pension plans must hold a fidelity bond coverage equal to at least 10% of the total plan’s assets. The ERISA fidelity bonds cover anyone who has access to a company’s retirement plan. ERISA bonds protect participants and beneficiaries from losses caused by the dishonest acts of a fiduciary who may mishandle an employee benefit plan, including 401(k)s.
Make sure to add your ERISA plan as an Additional Insured on your crime insurance policy, or else the coverage may not apply. You can also purchase an ERISA bond separately.
Fidelity Bonds Coverage
Fidelity bonds can cover losses caused by the following fraudulent activities:
- Employee dishonesty
- Credit card forgery
- Computer fraud
- Theft or destruction of property
This is why fidelity bonds are often thought to be the same as crime insurance—they protect the policyholder from the crime of another person. However, there are some notable differences between the two risk management solutions.
Fidelity Bonds vs. Crime Insurance
Albeit Fidelity bonds are a form of insurance, there are some significant differences between bonds and standard crime insurance policies. First, commercial crime insurance mostly covers financial losses resulting from business-related crimes.
By contrast, standard business insurance policies cover legal costs related to claims that could be filed against your company for a variety of reasons.
While both fidelity bonds and crime insurance policies cover losses due to employees’ crimes, a standard commercial crime policy also covers losses resulting from non-employee-specific crimes.
General Liability Insurance vs Commercial Crime Insurance
General Liability Insurance and Business Property Insurance do not provide employee theft coverage. Commercial general liability (CGL) only provides coverage to your small business for bodily injury and property damage caused by the business’s operations or products, or customer injuries that occur on the business’s premises.
Commercial Crime Insurance provides coverage for money, securities, and property against employees’ acts such as theft, robbery, fraud, or forgery or alteration.
Types of Crime Insurance Coverage
There are five different types of crime insurance coverage options depending on the specific insurance policies:
- Employee Dishonesty
- Money and Securities
- Money Orders and Counterfeit Money
- Money Transfer Frauds
- Forgery and Alteration
In this regard, crime insurance is similar to a fidelity bond. Employee dishonesty or Employee Theft refers to losses or damages (of money, securities, or other property) caused by employee dishonesty, theft, or forgery.
The legal term “employee” has a very specific definition in every crime insurance policy. It can denote full-time and part-time officials, independent contractors, volunteers, etc. Note the fact that the term “employee” excludes business owners, business partners, associates, affiliates, and senior managers. Before signing your commercial crime insurance policy, make sure that “employee” includes the types of workforce in your company.
Money, Securities, and Counterfeit Checks Coverage
Money and securities coverage applies to non-employee thefts and in that sense, it is inherent to commercial crime insurance. It covers the loss of money or securities up to a specified amount from theft, disappearance, or destruction that may occur inside or outside the business premises.
By definition, “inside the premises” includes money or securities located at a business location specified in the policy, while “outside the premises” covers money or securities in transit. This specific coverage applies to the financial loss that your business may suffer if employees erroneously accept counterfeit money, money orders, or checks.
Money Transfer Fraud
This specific crime policy coverage protects your business from losses resulting from fraudulent instructions provided to your bank by a third party that may mislead the bank employee to transfer funds out of your account. These misleading instructions may come via one of the following channels:
The misleading instructions may appear to have been sent by you or an authorized employee but were ultimately fraudulently transmitted by an unauthorized third party without your knowledge or consent. The coverage also extends to authentic written instructions issued by the business owner or a trusted employee that were subsequently subjected to forgery or alteration.
Commercial Crime Policy vs Cyber Policy
The question here is if the standard commercial crime policy provides sufficient protection against computer fraud, or your business may need specialized Cyber Insurance.
Computer Fraud is extra coverage that can be added to your crime policy. It protects your business from losses caused by the fraudulent transfer of your funds to a location unassociated with your business premises or bank via any computer.
While standard crime insurance covers some computer crimes which result in a financial loss to your business, a specialized cyber policy provides a much more detailed and comprehensive coverage. Ask your insurance broker if they can recommend a cyber insurance package in addition to your crime policy and guarantee the insurance clauses of the policies will complement each other.
Loss Discovered vs Loss Sustained
To file a commercial insurance claim, you should fill in either a loss discovered, or a loss sustained form.
When you file a “loss discovered” claim, you request that your insurance coverage applies to losses that were discovered during the policy period, regardless of when the act that led to the loss took place.
If you fill in and file a loss sustained form, you request the insurer to cover losses that your business suffered during the policy period.
Are Fidelity Bonds The Right Choice for Your Business?
Although fidelity bonds are not required by law, they are highly recommended for independent contractors, IT consulting companies, or providers of financial services. If your company stores or processes customers’ credit card numbers, social security numbers, or retirement plan assets. then you should consider buying any of the different types of fidelity bonds specified above.
Who needs crime insurance?
Crime insurance is for business owners who hire employees or use volunteers to perform different tasks. If your company conducts business with vendors or purveyors, then you should contact an insurance company and ask for their crime insurance options.
If the nature of your business involves maintaining inventories of goods or materials, or if it accepts Accepts cash, checks, or credit card payments, then maintaining a valid crime insurance policy is a good idea.