What Are Fidelity And Surety Bonds? And Does Your Business Need Them?
Dan Levenson October 26, 2015
Fidelity bond insurance can protect your business against the dishonest acts of your employees, damage or loss if a contract is not fulfilled, dishonesty by those who administer pension plans, and more. Surety bonds can protect you against tax liens against your business, and guarantee payment of utility bills.
This post will explain the different types of fidelity and surety bonds, as well as the key differences between the two depending on the size of your business, your industry, and the nature of your client relationships.
Some kinds of fidelity bonds include:
Fidelity Bonds For Pension Plans
The law requires a fidelity bond equal to at least 10% of the assets of a defined pension plan. The maximum required amount is $500,000 or $1 million if a plan holds employer securities. The bond must be in the name of the trust or plan, not the employer’s name, with no deductible. The bond has to state that the plan or plans ( listed by name), is covered.
It must also state that the general bond deductible doesn’t apply per ERISA requirements. The bond protects against possible dishonesty by those handling the pension plan.
Business Services (Fidelity) Bonds
This bond protects you against dishonest or fraudulent acts of your employees who work on a client’s premises. One example would be if your employee, who was working for your tech company, stole from a client’s office. You receive money to reimburse your client.
Blanket Fidelity Bond
This covers all of your employees, unless one or more is specifically included, as well as all new employees. All of your employees would be bonded for the same aggregate amount. The limit of liability would apply “per occurrence,” and the policy will define this. Your premiums would be based on the amount of coverage you request, the total number of your employees, your business activities, and your deductible.
This bond is often used by organizations with honorary or voluntary positions, such as in not-for-profit associations, businesses with frequent employee turnover, and businesses with large number of employees.
Schedule Fidelity Bond
This is often used by companies whose employees have a greater responsibility handling large sums of money, such as bookkeepers, real estate managers, and office managers. Such a bond is usually applicable to only selected or a few employees, for varying amounts. The limit of liability is scheduled per name or position.
Premiums are based on the number of individuals scheduled, the amount of coverage, the amount of coverage for each person listed, and the deductible.
Surety bonds guarantee payment for utility bills or state sales taxes. They involve three parties:
- the party required to perform (called the ‘principa’),
- the party who insures the principal’s actions (called the ‘suret’), and
- the party receiving the benefits of the work (called an ‘oblige’).
Some kinds of surety bonds include:
License And Permit Bond
This promises the covered business will comply with regulations and codes, usually established by a town, city, or state. Permit bonds grant a privilege. Some kinds include plumber’s license, electrician’s license, driveway permit, sign permit, and sales tax.
As an example, a plumber might have to post a bond for licensing, and he will have to promise to follow all the laws in a state, town, or city.
Contract Surety Bonds
If you are a supplier, contractor, or manufacturer, you may be contractually obligated to maintain a surety bond to guarantee your performance. You may need to obtain a surety bond, as a part of your bid process. You will have to pay the municipality if you fail to complete the contract. The municipality will use the money to pay another contractor to finish the job.
If there is a tax lien on your property, you can get the IRS to release it by posting a bond. This is required within 30 days of IRS acceptance of the bond.
If you have questions about fidelity and surety bonds or any other issue, feel free to contact us.