Fidelity 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.
Fidelity 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.).
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 a 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.
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, 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, 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 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. 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. 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.