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Dishonesty Bonds Explained

Bonding is not just an important part of your risk management strategy that helps optimize the cost of keeping your business safe, it’s also a requirement in many industries. Unfortunately, it’s not a very transparent experience for those who are new to bonds, and there are many types. One of the most common and widely used is the fidelity bond, also known to most managers and company officers as the employee dishonesty bond. Before buying your fidelity bonds, it’s important to know what type you’re being quoted. That’s because you may need to purchase more than one, especially if the bonding process needs to cover both rank-and-file employee conduct and that of company officers.

1st vs. 3rd-Party Bonds

Fidelity bonds are generally divided into two categories, those that pay out to third parties and those that pay out to your company. They’re used for very different purposes, and often companies wind up buying one of each to make sure their bases are covered. The first-party version of the fidelity bond is designed to protect your company from financial hardship caused by employee theft or misconduct, including financial crimes like embezzlement. The third-party version covers most of the same events, but it’s designed to protect clients who are damaged by the bad-faith or criminal actions of employees in your organization. They are especially important for those in roles that have a fiduciary duty to clients. In addition to being divided according to the party being protected, these bonds are also further divided into individual and group fidelity bonds.

Who Is Covered By Your Dishonesty Bond?

When you get a bond quoted, the quote takes into account the number of covered employees as well as the maximum amount the bond will pay out in the event that dishonesty of the covered kind comes to light. Often, for rank and file employees there is a single bond with wide coverage for the whole team, because it tends to save money in the long run. It’s also a good idea to consider individual fidelity bonds with their own limits for company officers and others in higher ranking positions, because often the exposure they could cause by acting dishonestly is a risk at a different order of magnitude from the risk posed by potentially dishonest employees outside the executive or managerial structure.

The best way to figure out your ideal bond quote is to discuss your range of needs with experts who understand how this aspect of risk management fits in with other policies, like your insurance coverage. That way, you can build a lean but effective risk management package for your business.

About Emma Gilbert

Working in the marketing industry since 2002. This blog is one of my hobbies.

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