Fidelity bond coverage is a critical risk management tool for businesses, but leaders must understand its limitations because, like all insurance, it covers only specific situations. When an employee causes losses through dishonest conduct, such as embezzlement, fidelity bond coverage can restore lost resources.
Businesses need to understand what losses their fidelity bond covers, which exclusions could affect their losses, and what actions establish eligibility for coverage. In addition, businesses without fidelity bond coverage need to understand how a policy can mitigate risk.
What is Fidelity Bond Insurance?
Fidelity bond insurance coverage is trust insurance that helps businesses maintain equilibrium in an environment that is presumed to be honest but often is not. This type of insurance covers a variety of losses caused by dishonest conduct by employees.
Fidelity insurance differs from commercial crime insurance policies that cover intentional dishonest behavior by third parties, such as customers. However, some crime insurance policies can cover losses stemming from dishonest actions both internally and externally.
What Types of Losses Can Fidelity Bond Coverage Address?
Depending on the way the policy is written, fidelity bond coverage can protect losses from employee dishonesty such as:
- Theft of company money or other property
- Fraudulent transfers or other forms of embezzlement
- Forgery
- Securities fraud
The increasing complexity of electronic transfers and information storage continues to create new opportunities for employees to purloin resources in ways that can be difficult to detect. Fidelity bond insurance policies may include exclusions that limit coverage. Or they may take the opposite approach and cover only conduct specifically described in the policy terms.
Who is Covered Under a Fidelity Bond?
Just as it is important to ensure that the circumstances leading to a loss are covered under a fidelity bond, it is also important to be certain that the person who engaged in dishonest conduct is covered by the bond. The policy language should define covered individuals.
It is important to ascertain:
- Whether coverage is limited strictly to employees or also includes independent contractors or others in a similar relationship with the business
- How an employee is defined
- Whether temporary employees are covered
- Whether coverage includes losses that result from the actions of multiple employees
Don’t assume everyone working at a business is covered. Many individuals may have a working relationship and access to critical information or financial resources but may not be covered by a fidelity bond unless you take steps to add them to the coverage.
What Does Fidelity Bond Insurance Usually Exclude?
If a worker or other person connected with the company is not covered by a fidelity bond, their actions will not be covered, but there are also many situations that are often specifically excluded, such as losses from :
- Dishonest actions that started before coverage began
- Negligent conduct
- Losses that are indirect or consequential
- Certain types of cybercrime
- Contractual disputes or other legitimate actions
Any loss that cannot be specifically attributed to a covered cause could be excluded from coverage by the insurance company. Many gray areas exist where a policyholder expects a loss to be covered and the insurance company finds a way to deny coverage because an exclusion applies.
What Should a Business Do After Discovering a Potential Fidelity Loss?
If a business determines that an employee may be acting dishonestly to drain company resources, it is wise to:
- Take steps to secure accounts and assets from further loss, such as notifying financial institutions and changing passwords
- Gather and preserve financial records, transaction histories, email correspondence, and other evidence of infidelity
- Determine when and how the loss(es) occurred
- Notify the insurance company that provided the fidelity bond in accordance with requirements
- Review the policy details closely
- Ensure that potentially relevant evidence is not altered or destroyed
It is also helpful to consult an insurance attorney before making any detailed statements to the insurance company. They will look for reasons to deny the claim, so it is important to present information without saying something that could give the insurer grounds to deny it. An experienced attorney can help you protect your interests and discuss how to report the losses to authorities.
FAQs About Fidelity Bond Coverage
Do I need fidelity bond coverage if my crime insurance policy covers employee theft?
You may not need a separate fidelity bond if your commercial crime insurance policy specifically covers employees’ acts. However, make sure all forms of dishonest actions are covered, including fraud and embezzlement.
What is an ERISA fidelity bond?
An ERISA fidelity bond covers employer-sponsored benefit plans from losses caused by fraud or dishonesty. If your company offers benefit plans subject to ERISA requirements, you must have an ERISA fidelity bond.
When is it a good idea to consult a business insurance attorney?
Consider consulting a knowledgeable insurance attorney if you have questions about the scope of your coverage, what you need to do to succeed with a claim, or how to handle the situation if the insurer has denied your claim or undervalued your losses.
Ver Ploeg & Marino Works to Keep Businesses Protected from Losses Caused by Dishonest Conduct
At Ver Ploeg & Marino, our attorneys resolve disputes in and out of court, and we also help companies understand their coverage so they can avoid disputes in the future. We explain coverage details to help avoid unpleasant surprises later.
When an insurance company tries to evade its contractual responsibilities under fidelity bond coverage or any policy, we fight efficiently to hold the insurer accountable so policyholders receive the full benefits they deserve under their policies. To discuss the assistance we may be able to provide in your situation, contact Ver Ploeg & Marino online or by calling 305-577-3996.
