The main purpose of fidelity bonds, in the general case, is to protect your business from potential fraudulent activities that your employees may commit.

While fidelity bonds are a category of surety bonds, they are closer in their function to insurance than to bonds. The latter typically work as a security instrument for government authorities and the general public, and don’t protect your business. As for fidelity bonds, they do provide a safety mechanism for your company.

The classifications of fidelity bonds can vary, but three main types can be outlined. Employee dishonesty bonds protect you in case you suffer damages from the illegal actions of people you’ve hired. Business services bonds can be used to compensate your customers in case of employee dishonesty. Last but not least, ERISA bonds are required of employee benefit plan managers to guarantee their legal compliance.

Here are the most important details about the three main types of fidelity bonds.

Employee dishonesty bonds

The way employee dishonesty bonds work is that they can offer a compensation for your business if your employees cause you damages as a result of their unlawful actions at work. These can include fraud, cash theft, forgery, embezzlement, robbery and burglary, transfer of funds, and more. You can obtain such a bond for individual employees, or a blanket one for a number of them.

In general, employee dishonesty bonds are not required by local, state or federal authorities. It is up to a company to make the decision to obtain them. Many businesses choose to get these bonds for employees who handle finances. These may include accountants, bookkeepers, financial officers, or simply employees using the cash register or having access to company finances in any other way.

Business services bonds

The second major type of fidelity bonds are business services bonds. They can protect your customers against theft and other illegal activities that your employees may commit while working on the customers’ premises. If such a situation occurs, there should be a proven reported case and typically a judgment. Then the harmed party can obtain a financial reimbursement from the bond.

Business services bonds are rarely obligatory, but are certainly a good idea for companies whose services include operating in private homes, offices and institutions. If your employees handle customers’ finances, assets or property, you may be required to get such a bond before you obtain your professional license. Even if you don’t have to meet such a criterion, getting this bond can save you a ton of trouble.

Your customers may also require or prefer to work with a bonded company, as this ensures their interests will be protected. Thus, the fidelity bond can be a sign of trustworthiness for them. The most common companies that can benefit from business services bonds include repair services, janitorial services, security providers, child care and pet care services, gardeners, plumbers, electricians, and moving services, among others.

ERISA bonds

The third major type of fidelity bonds are ERISA bonds. They are required by the Department of Labor under the Employee Retirement Income Security Act (ERISA) of 1974 from any manager of employee benefit plans. The bond can protect the beneficiaries of retirement and similar plans in case their managers commit fraudulent acts.

This means that the individuals in your company who have access to retirement and benefit plans’ assets have to be bonded. The required amount for each person is 10% of the benefit funds that they handle. The bond can be used to provide a compensation to harmed parties if the plan managers engage in theft, embezzlement, misappropriation, and similar illegal actions.

Do you have further questions about fidelity bonds? Don’t hesitate to post them in the comments below.

Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps business owners get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business. Follow him on Twitter: @Lance_Surety