This post is part of a series sponsored by Old Republic Surety.
Fidelity bonds differ from liability insurance and errors and omissions insurance. They protect against corporate crime. Does your commercial client’s business own valuable assets or expensive equipment? Maintain a large inventory? Have employees who can access their customers’ assets? Consider talking about fidelity bonds. We also offer tips to deter employee theft.
The industry refers to employee theft as white-collar crime — or corporate crime. It is a financially motivated, nonviolent crime committed by professional or government employees.
Data from the U.S. Justice Department shows that corporate crime prosecutions were up 4.1% in February over January 2021, but overall, corporate crime prosecutions are down 35.8% since 2016. Still, in 2021 the average business will lose 5% of its revenue to employee fraud or misuse of company resources. Small businesses suffer most, according to the National Federation of Independent Business, which reports that two-thirds of small businesses are victimized by their employees.
What is the one tool that businesses may use to mitigate their financial loss? A fidelity bond.
What is a fidelity bond?
Fidelity coverage, sometimes referred to as a fidelity bond, is actually an insurance coverage – the parties to the coverage are the named insured and the surety or the insurance provider. It is different from errors and omissions insurance, which protects against honest mistakes. It’s also different from liability insurance, which protects against claims caused by injuries to others.
Standard fidelity coverage is first party coverage for the named insured to protect them from financial loss due to employee theft and fraud. It is written to protect the business entity.
Why are fidelity bonds important?
Employee theft is a concern for all business types. Fidelity bonds may protect the business against financial loss due to employee dishonesty and theft.
Common types of fidelity claims
Fidelity bonds may help ensure some solvency for businesses should they fall victim to a financial loss due to employee dishonesty. Many business owners trust their employees, but real-life loss scenarios, unfortunately, tell a different story.
Here are some real-life examples of fidelity claims:
- Restaurant employees can steal more than money from the cash register — i.e., food or liquor. Two employees had been stealing shrink-wrapped cases of meat, racking up a significant theft total. They got caught.
- Nursing homes and assisted living facilities have a potential exposure when employees have access to residents’ funds. In this case, a trusted employee friend of the nursing home’s owner stole $400,000 from patient funds accounts. They got caught.
- A company’s employee who is responsible for handling deposits, withdrawals and reconciling the bank statement can easily hide a misappropriation of funds. An employee was able to fudge the deposit slips and deposit large amounts of cash into their own personal account. The person was eventually caught, but only after a lengthy series of thefts due to the lack of internal controls.
- An employee set up fake vendor companies that issued fake invoices. That employee approved the invoices, and the company paid the fake companies — and the employee received the checks at a P.O. Box. He got caught when his department downsized, eliminating his position while his last invoice had not yet arrived in the mail.
- A bank teller was about to lose her vehicle because she was behind in making payments. She borrowed funds from her bank drawer with the intention to return it. A surprise audit revealed the drawer to be short. She got caught.
- In a retail establishment, the part-time worker responsible for upkeep after hours was removing inventory in what looked like bags of trash. He would simply take the haul to his car. No oversight. Easy access. He got caught eventually.
In these examples, the thefts were discovered. Think about all of those that were never discovered or have yet to be discovered. How can you reduce the impact of theft like this on your business? A fidelity bond.
Fidelity bonds can mitigate your risk
It’s important to note that there are many types of fidelity bonds to choose from. A standard fidelity bond offers first party coverage for the business as discussed above. There are also bonds that provide third party coverage for clients of the Insured. For example:
ERISA bonds are required by the Employee Retirement Income Security Act (ERISA). These types of fidelity bonds protect the assets in employee pension plans from the dishonest acts by people managing them. This is a first party coverage as the plan would be reimbursed under the bond.
Third party bonds include:
Business services bonds protect companies or individuals that you’re providing with services from theft of client property by one of your employees. This has often been referred to as a “janitorial” bond, but may be written for many types of businesses.
Specialty outside services bonds protect customer property when your employees are handling it. For example, if you run a courier service and an employee steals something from a delivery, the specialty outside services bond may cover the damages.
All businesses should be concerned about employee theft. It’s a common problem, but businesses can protect themselves with the right type of fidelity bond.
Your business should consider a fidelity bond if:
- Your business has assets you wish to protect.
- Your business has valuable equipment or inventory.
Theft Deterrents in the Workplace
There are a few workflow enhancements that a business can implement to help reduce the likelihood that a theft could occur.
- Increase the difficulty of access to company assets.
- Be more aware of substance abuse or gambling addictions. These can lead to employee theft losses.
- Make sure there is ample oversight for positions that have access to company assets.
- In a retail setting, have security beepers on the back door as well as the front of the store.
- Have a clear and frequent inventory process that would catch any abnormalities.
- Segregate money-handling duties. A single person should not be able to handle deposits and/or withdrawals and reconcile the bank statement.
Fidelity bonds are extremely useful tools to help protect businesses from employee misconduct. They are imperative for today’s business world.
For more information about fidelity bonds and how they may protect your business and your customers, please contact your independent insurance agent. If you would like to be connected to an agent that Old Republic Surety is appointed with, please email us at ORSCManagement@orsurety.com, and we can get you connected.
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