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The Role of Fidelity Bonds in Mitigating Financial Risks for Businesses

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Financial institutions can protect themselves from various security risks with fidelity bond coverage. This can also enhance their reputation in the eyes of customers and investors, as they show that they take security seriously.

Fidelity bonds are insurance policies that cover theft, fraud, embezzlement, and other dishonest acts committed by employees. Regulators typically require them for certain types of businesses, such as banks and brokerage firms.

The Exclusions of Fidelity Bonds

Fidelity bonds protect businesses from financial loss due to wrongful acts of employees. This can include theft of money or assets, forgery, and dishonest trading. The type of bond purchased can vary, depending on the nature of a company’s business. For example, companies with sensitive information or payment systems, such as web hosting businesses, may need a more fidelity bond than small businesses.

The first-party bond is the most common fidelity bond, which protects a business against any wrongdoing its employees commit. However, third-party liability fidelity bonds protect clients or customers of the insured company against any wrongful acts committed by their employees.

Examples of third-party claims include a window repair worker who steals jewelry from a customer’s home or an employee at a real estate firm who forges checks for their clients. In these cases, it’s difficult for the company to recoup losses from the offending employee.

The First-Party Bond

First-party fidelity bonds (also known as commercial crime insurance or employee dishonesty coverage) reimburse businesses for losses that result from an act of theft, fraud, or forgery by a company’s employees. Client contracts often require these and can provide protection when traditional property insurance does not.

These are the most common type of fidelity bond and cover such things as the theft of cash or property by a company’s employees, such as robbing a safe. In addition, this type of bond covers acts such as forgery that affect the business, and it can also protect against losses due to a company’s inability to pay its debts.

Technology companies more commonly need third-party crime and fidelity surety bonds. These types of bonds typically cover a variety of on-premise services such as HVAC, plumbing, artisan and carpentry contractors, cable, security system and A/V installers, home inspectors, appraisers, and tow truck operators. These bonds have low coverage amounts and penalties to accommodate many technology businesses.

The Second-Party Bond

As biodiversity loss presents significant financial risks for businesses, investors are increasingly looking to invest in thematic bonds that link debt instruments to conservation activities. However, there still needs to be harmonization between green definitions and reporting standards, and it can be difficult for investors to evaluate corporate revenue streams that incorporate biodiversity considerations.

To overcome these challenges, a second-party evaluation is essential for businesses issuing green, social, or sustainability bonds. The review is an expert assessment of the bond framework against ICMA principles and helps strengthen the credibility of the issuer’s thematic bond offer to investors.

An independent party with sustainability expertise conducts the evaluation. It assesses the overall sustainability impact of the bond and evaluates the effects expected on the five use-of-proceeds categories against those recognized by NN Group GBP and SBP. The resulting limited assurance report will be published on the Bond Framework Website.

Finding the Right Balance Between Premiums and Coverage Limits

If your employees have access to sensitive financial or personal information, they may be at risk of committing acts of dishonesty. Fidelity or employee dishonesty bonds can protect your business from losses resulting from these acts.

There are various types of fidelity bonds to fit the needs of your business and industry. For example, janitorial service companies or HVAC businesses with employees working at client homes could benefit from third-party fidelity bonds that protect customers in the event of an employee theft.

Other types of fidelity bonds include ERISA fidelity bonds that cover fiduciaries as trustees or administrators for company retirement plans and monetary institution fidelity bonds that offer protection for financial institutions in the event of fraud. You can also choose blanket fidelity bonds that cover all of your employees or schedule bonds that allow you to specify coverage for individual at-risk job positions.

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