What is Fidelity Bonds?
Fidelity bonds is a type of insurance policy which covers the risk pertaining to the loss to the business from the fraudulent acts such as the theft, forgery, misuse of the assets and unauthorized sale of the assets, data theft, etc. by the employees of the company.
- They are designed to protect the business from the risk of loss by the dishonest acts of the employees. In large organizations where the numbers of employees are more and less reliable, fidelity bonds can be purchased to cover the risk of loss due to acts of employees.
- These bonds are like an insurance policy that covers the risk. These bonds are not tradable in the market. The aim behind this is to protect the assets of the business organization.
- The bonds are classified as first-party and third-party bonds; each covers the different types of employees. It also covers the risk of loss from the known third parties like clients, competitors, suppliers, etc. who can intentionally harm the business.
Types of Fidelity Bonds
There are two types First Party bonds and third-party bonds:
#1 – First Party Bonds
The First Party Bonds cover the risk of fraudulent acts from the directly related to the company. It includes employees, clients, suppliers, customers, etc. Fraudulent acts include theft, fraud, manipulation, etc.
#2 – Third-Party Bonds
Third-party bonds cover the risk of fraudulent acts from the persons connected with the company under the contract like contractual employees, freelancers, consultants, intermediaries, etc. and the act includes fraud, misuse, or selling of information, unlawful disclosures, etc.
How to Get Fidelity Bond?
- The employer can apply it if he is employing high-risk employees, or he has a threat in mind that some high-risk parties related to business can cause the loss to the business. It can be recommended by the employer to their employees to purchase the same.
- The fidelity bonds are obtained through insurance companies, insurance agents, or banks. They will check the eligibility for purchasing such bonds, and then after verifying the details provided, they will issue the bonds chosen by the policyholder.
- The insurer can also suggest the type of bond to be taken as per the requirements of the insured. It can also be purchased from approved surety companies.
- In case of contribution to the schemes covered by the Employee Retirement Income Security Act, the fidelity bonds are required to purchase at 10 percent of the value of plan assets.
- Only the employees or parties which are concerned directly with cash, cheques, other property, or any useful information, authorized persons are covered for fidelity bond policy.
- For the purchase, employers should have employees; the self-employed cannot purchase fidelity bonds.
- The minimum amount to be invested in fidelity bonds is $ 1,000 or 10% of plan assets, whichever is higher, and the maximum amount is $ 500,000. In case the plan holds the employer securities also then the full amount is $ 1 million.
- To cover the risk of loss from the high risk-based employees.
- To protect the business from the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors. by the act of others related to the business.
- To minimize the risk from known third parties also.
- It is safeguarding the company’s assets.
- To control the misuse of assets by high-risk employees as insurance companies continually track the actions of high-risk based employees and third parties.
- It protects criminal acts or fraudulent acts by employees and third parties.
- These bonds continuously track the records and actions by high-risk-based employees; hence the chances of misuse of assets by employees are reduced.
- It protects the company from financial loss.
- Provide risk coverage for criminal, fraudulent, and loss-making actions.
- Reduce the risk of fraud by the persons covered as the insurer continuously under observes them.
- Reimburse the loss as well as punish the culprit.
- Benefited from an organization with a large number of employees.
- Gives Employment to the honest employees from a criminal background as the business organization can provide a chance for these employees by taking the Fidelity Bonds.
- Only risks of loss by known parties are covered.
- It gives a chance to the company to plan the fraud and claim the loss from fidelity insurance bonds.
- The high cost of purchasing the bonds.
- It frees the companies from the risk of loss due to criminal and other acts and results the common internal control.
- High chances of fake claims by deliberate fraudulent actions.
- Fidelity Bonds are a type of insurance policy covering the loss of theft, forgery, misuse of assets by the employees, and the known third parties. It is beneficial for companies with a large number of employees or the company that employs the employee from the criminal background.
- It is the same as the criminal policy, but it covers more than the illegal policy. It provides financial security to the company in case of loss due to acts of known parties. But at the same time, the fraud can be deliberately planned by the organizations to claim against the policy.
- The premium is also high in the case of fidelity bonds; hence the cost of the company increases. It also continuously track the actions of increased risk based parties; therefore the chances of misuse of assets by them got reduced.
This has been a guide o fidelity bonds and its meaning. Here we discuss types, requirement, need, importance, and how to get Fidelity Bonds along with advantages and disadvantages. You may learn more about financing from the following articles –