Fidelity Bond
What Is a Fidelity Bond?
A fidelity bond is a type of surety bond that helps protect your clients if one of your employees commits a dishonest act, like theft, fraud, or embezzlement, while working at a customer’s premises or on a client’s account.
The following are common types of fidelity bonds:
- Business service bonds
- ERISA bonds (Employee Retirement Income Security Act)
- Financial institution bonds
Who Does a Fidelity Bond Protect?
Fidelity bonds protect your clients. These bonds promise clients they won’t suffer a financial loss due to a dishonest act by your staff. For example:
- A client claims one of your landscapers stole tools from their shed while trimming trees. The bond can reimburse the client for those tools.
- A bookkeeper steals money from a client by writing themselves a check from the client’s account. The bond can pay the client back for what was stolen.
- A client says one of your crew’s housekeepers stole jewelry from a bedroom nightstand while cleaning. The bond can compensate the homeowner.
Unlike small business insurance, being bonded does not always financially protect your business. But it can help you land work, meet contractual requirements, and protect your business’ reputation.
How Do Fidelity Bonds Work?
In general, bonds guarantee your performance or your team’s honesty to clients. If there’s a claim, and the surety bond pays it, you and your business must then reimburse the surety company after.
There are three parties involved with most bonds:
- Principal: Your business (the one being bonded)
- Obligee: Your client (the party the bond protects)
- Surety: The company that issues the bond and guarantees payment if a covered loss happens
How fidelity bonds work:
- An employee’s dishonest act causes your client a financial loss
- The client makes a claim on the bond with the surety company
- The surety company verifies that it’s a covered loss and pays the client (up to the bond’s limit)
- Your business then repays the surety company what it paid to your client
A more detailed example:
Your business, Sudsy Bucket Carpet Cleaners, is required to carry a $10,000 fidelity bond as part of your contract with a local business office, Gemini Appraisers Ltd. So, you get a $10,000 fidelity bond.
After two months, the owner of Gemini Appraisers believes one of your employees is responsible for the theft of a $4,500 engagement ring being held in their office. Gemini makes a claim with your bonding company (aka the surety company).
The surety company investigates the claim and issues payment for the lost ring when they deem the claim valid. SudsyBucket must reimburse the bond company the $4,500 they paid for that ring.
Do Small Businesses Need Fidelity Bonds?
Yes, sometimes! Your small business may need a fidelity bond if someone on your team could steal from a client while working on behalf of your business. You may also need one when a license, contract, or client requires it.
Small businesses commonly need fidelity bonds when:
- Licensing or permits require it: Some cities or states require bonds for cleaners, contractors, or service businesses
- Contracts or bids require it: Property managers, offices, franchises, and enterprise clients often make it a condition of work
- Clients request it: Many clients ask for a bond number in addition to your Certificate of Insurance (COI) before they’ll hire you
- You manage employee benefit plans: An ERISA fidelity bond is typically required for those plan assets if you have a 401(k) or similar plan
General Liability Insurance vs Fidelity Bonds: What’s the Difference?
General liability insurance is designed for unintentional harm your business causes others. Fidelity bonds are additional coverages, designed to protect your clients if your employee does something dishonest.
| Fidelity Bonds | General Liability Insurance | |
|---|---|---|
|
What it is |
A surety bond that reimburses your client if your employee steals from them |
Insurance that pays for covered accidents or mistakes that harm others |
|
Who it protects |
Your client (the “obligee”) |
Your business and third parties (injured customers, damaged property owners) |
|
Typical coverage triggers |
Dishonest acts by your employee, like theft or embezzlement, during services for a client |
Bodily injury, property damage, or certain types of advertising mistakes caused by your operations |
|
Who pays (and who repays) |
Surety pays the client up to the bond limit; your business repays the surety |
The insurer pays covered claims up to policy limits; you don’t repay the insurer |
|
Common uses |
For client trust and contract requirements |
Everyday injury and property damage risks related to your business |
|
Proof to clients |
Bond form or number, often listed in license or bid paperwork |
Certificate of Insurance (COI) showing active limits |
|
Not covered |
Accidents, negligence, poor advice, or owner fraud (general / professional liability needed) |
Employee theft from a client (that’s a bond/crime issue) |
What it is
Fidelity Bonds: A surety bond that reimburses your client if your employee steals from them
General Liability Insurance: Insurance that pays for covered accidents or mistakes that harm others
Who it protects
Fidelity Bonds: Your client (the “obligee”)
General Liability Insurance: Your business and third parties (injured customers, damaged property owners)
Typical coverage triggers
Fidelity Bonds: Dishonest acts by your employee, like theft or embezzlement, during services for a client
General Liability Insurance: Bodily injury, property damage, or certain types of advertising mistakes caused by your operations
Who pays (and who repays)
Fidelity Bonds: Surety pays the client up to the bond limit; your business repays the surety
General Liability Insurance: The insurer pays covered claims up to policy limits; you don’t repay the insurer
Common uses
Fidelity Bonds: For client trust and contract requirements
General Liability Insurance: Everyday injury and property damage risks related to your business
Proof to clients
Fidelity Bonds: Bond form or number, often listed in license or bid paperwork
General Liability Insurance: Certificate of Insurance (COI) showing active limits
Not covered
Fidelity Bonds: Accidents, negligence, poor advice, or owner fraud (general / professional liability needed)
General Liability Insurance: Employee theft from a client (that’s a bond/crime issue)
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