What is a Fidelity Bond?

In today’s world, it is possible to take out insurance against almost any type of loss or damage. A fidelity bond is a type of insurance that covers policyholders in the event of losses that are incurred as a result of harmful acts by certain specific individuals. A fidelity bond most often takes the form of business insurance, insuring employers against losses caused by the fraudulent acts of its employees. Securities firms are among the types of companies required to hold fidelity bonds.

Any employer who withholds federal income taxes from their employee’s wages, who wishes to purchase a fidelity bond, may do so, in order to protect themselves from losses incurred when hiring high-risk employees. Fidelity bonds work in the following way. First, the value of the property at risk is assessed, and fidelity bond coverage is issued in amounts from $5,000 US Dollars (USD) to $25,000 USD, in increments of $5,000 USD. The insurance provided by fidelity bonds carries no deductibles, and becomes effective on the first day that the high-risk individual is employed by the company. Fidelity bonds initially expire after six months, but employers are able to purchase additional coverage after the six-month expiration.

In order to obtain a fidelity bond for a prospective employee, the employer typically must write a letter containing a formal offer of employment. The letter must be on the company’s official letterhead, and must contain detailed information about the prospective employee, the job being offered, the starting date, rate of pay, and other information regarding the employment. The letter also describes the amount of coverage the employer needs, and a justification for the amount, if it exceeds $5,000 USD. This letter must then be approved by the authority issuing the fidelity bond in order for coverage to be obtained.

The fidelity bond creates a win/win situation for employers and workers, in that it serves as an incentive for employers to hire individuals who might otherwise be denied employment, and to do so with minimal personal and professional risk involved. Examples of workers who might be considered risky to employers might include former substance abusers, individuals with poor credit history or who receive public assistance, or those who have received a dishonorable discharge from service in the armed forces. Fidelity bonds make it possible for these individuals to more easily find new opportunities and a second chance for gainful employment.