A Fidelity bond is also known as employee dishonesty coverage. This coverage, if purchased only to cover the dishonest acts of employees, is not a mandatory coverage. The federal or state government does not require employers to purchase insurance to protect their business from employee theft.
However, it is possible to endorse additional exposures onto a fidelity bond, which may make it subject to federal requirements. Whether or not coverage is mandatory depends on the exposures covered by the bond.
What Does a Fidelity Bond Cover?
A fidelity bond protects your business from dishonest actions committed by your employees. Dishonest acts include but are not limited to theft of money, securities and inventory. It also protects your business from fraudulent acts such as unauthorized electronic transfers, computer fraud, credit card fraud and more. The forever-evolving technology creates new and creative ways for employees to commit fraud. A fidelity bond covers such dishonest acts.
There are no state or federal laws requiring you to protect your own assets, and therefore, it is not absolutely necessary to purchase a fidelity bond to protect your assets. However, as a prudent businessperson, it’s best to evaluate your exposures and decide whether or not your employees have the ability to inflict a large financial loss to your business as a result of a dishonest act.
Employee Retirement Plans
If you offer an employee retirement plan to your employees, now you’ve entered an arena where there are federal mandates. With the enactment of the Employee Retirement Income Security Act (ERISA) in 1974 all businesses offering an employee retirement plan to its employees must secure a fidelity bond for the managers of the plan. In such cases, the fidelity bond is also referred to as a pension bond.
ERISA’s intent is to protect the plan’s assets from dishonest acts or embezzlement by the plan managers. If the managers mismanage the funds that result in financial loss to the retirement plan, the pension bond reimburses the plan for losses sustained. The bond must be equal to at least 10% of the plan assets up to a maximum of $500,000.
Combining Fidelity and Retirement Bonds
Rather than purchase two separate policies, one for employee dishonesty and another to satisfy ERISA requirements, it is possible to endorse an existing employee dishonesty policy to cover retirement plans. By combining the exposures under one policy, you realize a cost savings. Endorsing an existing fidelity bond is cheaper than purchasing two separate policies. Plus, consolidating both exposures under one policy makes for a more streamlined policy renewal process.