Fidelity Bonds and Surety Bonds
I got a great question today from a very good client: what is the difference between a fidelity bond and a surety bond? So, here’s my best shot at explaining the difference. Hopefully, you can determine which boat you are in at the end of this.
erisa and surety bonds make up the largest two classes of corporate bonds. In general, a fidelity bond guarantees the person while a surety bond guarantees the performance. Thus, a fidelity bond is specific to the individual while the surety bond is specific to the job (and this type of bond can be broken up into a variety of flavors, from payment to performance, etc.).
A surety bond is a binding contract between three parties: the principal, the obligee, and the surety. The surety company is responsible for guaranteeing the obligations outlined in the bond and ensuring that the principal fulfills their contractual duties. All bonds that cover positions of trust are fidelity bonds while contract bonds are considered surety bonds. In the old days, these were both referred to as corporate surety bonds.
There are exceptions, of course, to the general classification above. These exceptions can be very numerous and sometimes it seems as if the exceptions will overwhelm the basic rule. Still, it’s nice to know that the general holds true.
What is a Surety Bond?
A surety bond is a binding contract between three parties: the principal (you or your business), the surety (the insurance company), and the obligee (the customer or entity requiring the bond). The surety guarantees to the obligee that the principal will act in accordance with the terms of the bond. In essence, a surety bond is a type of business insurance that provides financial protection to customers and clients. It ensures that the principal will fulfill their contractual obligations, and if they fail to do so, the surety will step in to cover the losses.
What is a Fidelity Bond?
A fidelity bond is a type of insurance policy that protects businesses against financial losses caused by employee dishonesty, such as theft, embezzlement, or forgery. It is also known as dishonesty coverage or crime insurance. Fidelity bonds provide coverage for businesses against losses resulting from employee misconduct, and they can be customized to cover specific employees or job positions. By having a fidelity bond, businesses can mitigate the risk of financial losses due to employee dishonesty and protect their assets.
Key Differences Between Fidelity and Surety Bonds
While both fidelity and surety bonds provide financial protection, they serve different purposes and have distinct characteristics. The key differences between fidelity and surety bonds are:
- Purpose: Fidelity bonds protect businesses against financial losses caused by employee dishonesty, while surety bonds guarantee the fulfillment of contractual obligations.
- Coverage: Fidelity bonds cover employee-related risks, such as theft and embezzlement, while surety bonds cover contractual obligations, such as performance and payment bonds.
- Parties involved: Fidelity bonds involve two parties: the principal (business) and the surety (insurance company). Surety bonds involve three parties: the principal (business), the surety (insurance company), and the obligee (customer or entity requiring the bond).
License and Permit Bonds Required by the Law
There are also a variety of bonds that are required by law. All forms of contract bonds that pertain to the Federal government, state, and municipal governments are required by law. A subset of these are the Little Miller Acts that require bonds on federal jobs.
Bonds that are required by law before one can serve as a administrator, guardian, trustee, executor, fiduciary bonds, assignee or otherwise in connection with a legal transaction (such as is required in any probate situation), before someone is qualified to serve in a public office and before engaging in certain specialized lines of business, such as cigar, tobacco, and liquor sales, license and permit bonds, also require a fidelity bond.
As a general rule of thumb, a fidelity bond that covers bank employees, persons in fraternal orders, etc. and those that provide security for private companies are not required by law. These bonds are issued to provide the private organization some assurance that the person serving will not take advantage - or provides a benefit if they are swindled. These protections are seen by the private companies as beneficial not only to themselves, but to any investors or other stakeholders in the organizations that do not have the same familiarity with the person being asked to serve in a fiduciary capacity.
Why do I have to give a bond for contractual obligations if it's not required by the law?
Well, the first and obviously best answer is that if you want to perform the job being asked, and the bond is required, then you have to do it.
But a better, and deeper, understanding is helpful. Commercial surety bonds cover various aspects of business operations, ensuring compliance and mitigating risks. The stability provided by a bond, through its loss-paying power, prompt payment of losses and character of service benefits are clearly helpful to the parties that want to enter into the transaction. Contract surety bonds are essential for ensuring that contractors fulfill their obligations in construction and other industries. Their lack of perfect information only fuels the fire of the perceived problems that can arise in personal surety, such as absconding with funds, bankruptcy, death, disability, etc.
Thus, these two types of bonds - fidelity bonds and surety bonds - certainly help with the ability to keep commerce flowing.
Gary Swiftbonds | Our short bio
Be sure to check out more at Swiftbonds.com
Importance of Fidelity Bonds for Businesses
Fidelity bonds are essential for businesses that want to protect themselves against financial losses caused by employee dishonesty. Here are some reasons why fidelity bonds are important for businesses:
- Protection against employee theft: Fidelity bonds provide coverage against employee theft, embezzlement, and other forms of dishonesty.
- Mitigation of financial losses: By having a fidelity bond, businesses can mitigate the risk of financial losses due to employee misconduct.
- Compliance with regulations: Some industries, such as finance and healthcare, require businesses to have fidelity bonds to comply with regulatory requirements.
- Enhanced credibility: Having a fidelity bond can enhance a business’s credibility and reputation, as it demonstrates a commitment to protecting customers and assets.
