A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees. While called bonds, these obligations to protect an employer from employee-dishonesty losses are really insurance policies. These insurance policies protect from losses of company monies, securities, and other property from employees who have a manifest intent to i) cause the company to sustain a loss and ii) obtain an improper financial benefit, either for themselves or another party. There are also many other coverage extensions available through the purchase of additional insuring agreements. These are common to most crime insurance policies and are designed to further protect specific company assets.
First-Party Vs. Third-Party Fidelity Bonds
There are two types of fidelity bonds: first-party and third-party. First-party fidelity bonds protect businesses against intentionally wrongful acts committed by employees of that business. Third-party fidelity bonds protect businesses against intentionally wrongful acts committed by people working for them on a contract basis. In business partnerships, it is the responsibility of the business working as a contractor or subcontractor to carry third-party fidelity bond coverage, though it is typically the other party who requests or requires such coverage. In many cases, businesses in finance or banking require their contractors to carry third-party fidelity bond coverage to prevent losses from theft.
The fidelity bond marketplace is, generally speaking, split into two main type of policies; financial institution bonds and commercial crime policies. Within each category there are different policy forms designed for specific types of institutions. These include:
Financial Institution Bonds, Standard Form No. 14 for Brokers/Dealers
Financial Institution Bonds, Standard Form No. 15 for Mortgage Bankers and Finance Companies
Fidelity insurers need to not only understand the threat posed to companies from traditional elements such as employee dishonesty, robbery or cheque forgery, they need to stay informed of emerging trends or evolving threat vectors.
Also known as Business Email Compromise or Impersonation Fraud, this fraud typically involves someone close to the insured company being impersonated - often quite convincingly - and tricking the company into transferring funds to the fraudster. These funds are often then quickly transferred offshore making recovery very challenging. Despite the pervasiveness of this threat, most traditional insurance policies do not cover this type of loss. Many policyholders have challenged insurance company's assertions that this is not a covered loss in court, however a string of recent North American cases support the insurers' positions, notably American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America', The Brick Warehouse LP v. Chubb Insurance Company of Canada', and Taylor & Lieberman v. Federal Insurance Company. The industry has responded to these events by making an extension of coverage available but they are typically subject to additional premium, robust underwriting questions, and are often sublimited.
