Surety bonds are three-party contracts that ensure certain obligations are upheld. A fidelity bond is a specific type of surety bond designed to protect an organization, employees or clients from employee theft or fraud.
Surety Bond vs Fidelity Bond: Differences Explained
In a standard surety bond contract, the obligee is typically a government entity and the principal is the company. With fidelity bonds, there is not always a third-party obligee. Instead, the obligee is often the company itself and the employees or fiduciaries are the principals.
| Surety Bond | Fidelity Bond | |
|---|---|---|
Principal | The company/professional | Employees or fiduciaries |
Obligee | Government entity or external entity | The company getting bonded |
What’s the Main Purpose of Fidelity Bonds?
Fidelity bonds exist to create security for companies with employees in high-risk positions. They operate like supplemental insurance for organizations to protect assets such as cash, physical goods, intellectual property and other sensitive information.
Typically, they are voluntary with the exception of federally-required ERISA fidelity bonds. Some larger clients may also require fidelity bonds before hiring a contracted service provider.
What’s the Difference Between a Fidelity Bond and Employee Dishonesty Insurance?
Fidelity bonds are sometimes confused with employee dishonesty insurance. They offer very similar protections, however bond coverage differs from insurance:
- A fidelity bond acts like a line of credit to cover potential losses caused by employee theft, fraud or dishonesty.
- Employee dishonesty coverage is often part of a crime insurance policy that provides a broader scope of coverage and limits, however fidelity bonds are often more affordable.
Sometimes, businesses need both employee dishonesty insurance and a bond to meet contract requirements for a client or to comfortably mitigate risk. Employee dishonesty insurance does not cover volunteers, so fidelity bonds are especially useful for nonprofit and public organizations with many volunteers.
How Do Fidelity Bonds Differ From Other Surety Bond Types?
Fiduciary Bonds vs Fidelity Bonds
Both of these surety bonds protect individuals and their assets, but they are not the same. A fiduciary bond holds an estate fiduciary liable to meeting specific court orders. A fidelity bond protects employers and individuals from losses incurred by dishonest employees.
ERISA Bonds vs Fidelity Bonds
ERISA bonds are a unique type of fidelity bond that protect individuals who contribute to 401(k)s and other employee retirement plans. In an ERISA bond, the obligee is the benefits plan itself rather than the employer.
Business Service Bonds vs Fidelity Bonds
Business service bonds are a specific type of fidelity bond that protects the client from employee theft, whereas standard fidelity bonds protect the company from employee theft.
License Bonds vs Fidelity Bonds
Many license and permit surety bonds have employee dishonesty clauses written into their statutes but are still considered license obligations rather than fidelity bonds. Fidelity bonds solely protect against employee dishonesty, while other surety bonds often cover broader professional responsibilities.
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