Fidelity Bonds: Good for Employers and an Insurance Agency's Bottom Line

Corporate CrimeIt’s an all too common occurrence: A trusted, longtime employee starts stealing from the company. At first, it may be only a few small items. Then the employee becomes emboldened by how easy it is to forge checks, alter invoices or pad expenses. Often this goes on for years. Greed or carelessness may finally lead to the employee being caught. By then, the business has suffered significant losses.

Employee theft can add up to hundreds of thousands of dollars — an average of 5% of a company’s annual revenue, according to the Association of Certified Fraud Examiners (ACFE). And it’s not just money. Employees steal inventory, office supplies, even time. Security Magazine reports the total cost to U.S. businesses is $50 billion per year.

Theft isn’t limited to the employer’s job site. Workers who visit a customer’s premises may walk away with jewelry, cash, laptops and other valuable items, or they may damage property. Contractors, consultants, painters, pet sitters, repairmen, janitors, home healthcare workers and computer technicians are just some of the employees who may work off-site and unsupervised.

What can be done?

Thankfully, there is insurance protection to cover employee dishonesty and theft, and it’s economical and easy to purchase. Known as fidelity bonds, these policies should be part of an employer’s insurance program, along with business liability and property insurance.

While surety companies usually sell fidelity bonds, they are actually a form of insurance. The policies are sold as one-year contracts that can be renewed annually. When a company suffers a loss, it makes a claim that is then paid by the insurer.

There are typically three types of coverage available:

Standard fidelity protects an employer against employee dishonesty. Most policies cover theft and embezzlement, computer fraud, illegal fund transfers, counterfeiting and other dishonest acts.

Business service or third-party fidelity is for businesses that have employees who work on their customers’ property. If the employee steals from the customer and there is a conviction, the bond will pay for the loss. When service contractors say they are bonded, this is the type of bond they are referring to.

ERISA bonds are required by the Employee Retirement Income Security Act for employers who offer 401(k) or other retirement plans to their employees. Employers must have a bond equal to 10% of the assets they manage, up to a maximum of $500,000. ERISA bonds protect the plan from the misappropriation of funds.

Good for employers and insurance agencies

Fidelity bonds are a win-win for both the employer and the agent. They’re an inexpensive way to provide additional coverage to an employer, and the agent earns extra income from the sale. I always recommend that when agents review their clients’ business liability, workers’ compensation and property coverage, they also discuss fidelity coverage. The premiums are relatively low, and the customer has the added protection of being covered against employee fraud and theft. It also allows the customer to say that his firm is bonded.

Fidelity is an easy coverage for agents to write. Business service and ERISA coverage are available through an online portal. Agents simply enter information on the employer, and the bond is immediately issued. For standard fidelity, the agent must submit an application for approval. It takes a little longer, but most sureties are very responsive in writing this coverage.

If you’re an insurance agent, you should definitely include fidelity coverage in your clients’ renewal checklist. Fidelity helps you add value to your client’s portfolio while generating additional cash flow to your agency. Educate them on how employee theft or fraud can be devastating to their business.

Tightening financial controls

A simple discussion of fidelity coverage may prompt an employer to tighten financial controls or better monitor supplies and inventory. Whenever we write a fidelity bond, we check to see if the employer has policies and procedures in place to prevent losses. Small firms, in particular, may not be adequately protected against fraud and embezzlement. Sometimes asking a few basic questions can help a business protect its finances and property.

Companies of all sizes can benefit from instituting these basic checks and balances:

  • Confirm past employment, job references, certifications and degrees, and consider a background check before hiring someone.

  • Have written policies regarding theft and fraud, and enforce them.

  • Separate operations from accounting. Don’t let one person have total control over funds. Someone authorized to write checks shouldn’t be making deposits or reconciling bank statements. Checks should be countersigned.

  • Limit who can handle cash and institute controls.

  • Create a paper trail for each accounting transaction.

  • Count inventory on a regular basis and compare it to records.

  • Lock and limit access to storage areas.

  • Don’t hesitate to contact the authorities and press charges if there is a case of theft.

There is good news. In its 2022 Report to the Nations, ACFE reports that median losses from occupational fraud are down 16% from 2012. Still, ACFE reports estimated global occupational fraud for 2021 at $4.7 trillion, and it lists the construction industry among the top five industries experiencing those losses. Agents need to discuss fidelity bonds with their clients to help them protect their business.


Shayne Albine

Shayne Albine is the Southeast Regional Vice President of Commercial Surety for Old Republic Surety. Before joining Old Republic Surety Company in 2013 as a Senior Commercial Underwriter, she was an Account Underwriter of Bond and Specialty Insurance for Travelers.