A fidelity bond is business insurance for employers. This offers employers protection against losses caused by an employee’s dishonest action or fraud. The insurance protects against monetary or physical losses. These are not tradable securities.
If the employees of a company commit dishonest acts, the company is exposed to financial or legal penalty. Firms with many employees are exposed to such penalties quite often and therefore, fidelity Bonds cover these companies for such damage.
Fidelity bonds are usually held by Insurance companies, banks and brokerage firms which require to carry protection that is proportional to their net Capital. It covers frauds like fraudulent trading theft and forgery.
Fidelity bonds are also considered as a business’ approach to Enterprise Risk Management.
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Various types of fidelity bonds are available to cover employee’s illicit acts, while performing services to customers. For example, if the watchman of a company steals a client’s equipment or money, the insurance will cover such incidents.
Certain kinds of fidelity bonds may be mandatory for businesses to obtain. For example, if a company has assets for a bonus plan and an employee messes that up, a fidelity bond would be required to encompass the incident beforehand.
There are two kinds of fidelity bonds, i.e. first-party and third-party fidelity bonds. The first-party fidelity bond protects businesses against intentionally wrongful acts committed by employees. Third-party fidelity bonds protect businesses against people working for the company on a contract Basis.
In Australia, fidelity bonds are also called as fidelity insurance. In the United Kingdom, this is called fidelity guarantee insurance coverage.