A fidelity bond protects a business from dishonest acts committed by employees against the employer or business. Fiduciary liability insurance pays the amount a business becomes legally liable to pay as a result of a breach of fiduciary responsibility.
Insurance vs. Bonds
When comparing fiduciary insurance to a fidelity bond, you should first understand the difference between insurance and a bond. A business owner purchases insurance to protect the business from a potential loss. If a loss occurs, the insured (in the event of a property loss) or the injured party (in the event of a liability claim) is financially reimbursed. With a bond, the insurance company (surety) guarantees the actions of an individual or entity (principle). If the individual/entity does not perform the action, the insurance company issues payment to the injured party (obligee).
There are two types
of fiduciary insurance: fiduciary liability policies and fiduciary bonds. Fiduciary liability policy pays the amount a company is legally liable to pay as a result of a breach of contract or mismanagement of a fiduciary duty. A fiduciary bond guarantees the fiduciary will adequately perform the duties in the roll of fiduciary. If the fiduciary does not and embezzles or mismanages the funds, the insurance company issues a check to the owner of the embezzled or mismanaged funds.
In the case of a fidelity bond, the surety relationship is between the insurance company and the business owner. The surety is guaranteeing the bonded employees will refrain from criminal acts against the employer. If the employees engage in a criminal act and the employer suffers a loss, the insurance company reimburses the employer and seeks restitution from the dishonest employees.
Which Coverage to Purchase