What Is Fidelity Bond Coverage?

Fidelity bonds are a type of business insurance that does two things. It is sometimes referred to as crime insurance for businesses. It protects a business against high-risk employees, and it allows employees who are considered high-risk to get hired when they otherwise wouldn't. It also protects high-money industries such as banks and brokerage houses. Employee fraud is common, and $3 billion of business profits are lost every year to high-risk employees, according to State Farm Insurance.

A fidelity bond can have a value of $5,000 to $25,000, depending on the amount of property that the business has at risk. There is no deductible amount, and the insurance becomes effective the day the employee starts work. The bond insurance is valid for only six months. After that the employee is past an extended probationary period and is no longer considered to be as high-risk. An employer can request an extension on the bond, though this is uncommon.

A high-risk employee has a history that shows he might be untrustworthy, be in financial ruin, have a criminal background, be on welfare, or have been dishonorably discharged from the military. A high-risk employee can also be a person that works at a bank or brokerage house where people have access to large amounts of money and information. Although a fidelity bond might seem discriminatory towards employees, it is really in their benefit. Some people might not otherwise be hired because of a criminal background, and some might use valuable resources for unauthorized trading, for example.

A fidelity bond can protect an employer from an employee who commits a crime against the business. This can be theft, forgery, computer fraud, or facilitating a robbery of some sort. When letting any employee into a business, especially a small business, you are inherently allowing a stranger to enter the premises. It can be hard to trust anyone, let alone someone who already has a bad track record or is otherwise untrustworthy. This is why fidelity bond coverage is a win/win situation for both the employer and the employee.

Any employer that collects federal taxes from its employees' wages can purchase a fidelity bond. Insurance companies offer fidelity bonds. An employer needs to write a letter on its official letterhead, giving information about the prospective employee, the job he or she is being offered, and the start date. The insurance company will send an authorization to the person.

Companies in the financial industry need to be especially cautious. The U.S. Securities and Exchange Commission requires brokerage firms to have blanket fidelity bonds in case an employee makes illegal trades, according to Bloomberg.com.

A company that has a fidelity bond can take the risk of hiring someone with a sketchy background and give that person a chance to prove themselves. It is a second chance for many people, and it also protects the company from people who have a clean record but should not be trusted.