Fidelity First: How Employee Dishonesty Bonds Safeguard Your Company

The quiet danger of employee theft casts a long shadow across companies of every size. It’s a grim fact: employee dishonesty costs American companies an estimated $50 billion a year. 

Even worse, research indicates that employee theft contributes to 30% of all company failures. This isn’t merely about missing money; it’s about protecting your firm’s very survival. 

For many entrepreneurs, the thought of internal betrayal is deeply unsettling. Yet, without proper safeguards, your business remains vulnerable.  

We believe in proactive protection. That’s why understanding and securing an employee dishonesty bond is not just smart business; it’s essential risk management.

Employee dishonesty, however, is widespread. Companies lose a total of $50 billion annually due to theft, fraud, and embezzlement by their own employees.  

That’s a mind-boggling number that makes the employee dishonesty bond a vital part of any solid business defense program. 

What Is An Employee Dishonesty Bond? 

Essentially, an employee dishonesty bond is a form of fidelity bond. Instead of the standard form of insurance against outside threats such as fire or earthquakes, an employee dishonesty bond is focused on internal risks. 

Covered Losses Vs. Typical Exclusions 

Knowing what an employee dishonesty bond covers and doesn’t cover is important in order to get the maximum value out of its protective features. 

• Typically Covered Deeds Are: Taking by an employee through embezzlement, misappropriation, theft, or other dishonest acts. 
• Forgery: The manufacture or alteration of documents with the purpose of defrauding, e.g., checks or invoices forgery. 
• Computer Fraud: The unauthorized entry into or tampering with computer systems for purposes of committing theft or fraud. This may involve unauthorized wire transfers. 
• Merchandise Theft: The theft of physical merchandise or inventory from the business facility. 
• Cash Theft: The unauthorized appropriation of cash, either from registers, safes, or deposits. 
• Credit Card Fraud: Unauthorized use of company credit cards by an employee. 
• However, it’s equally important to be aware of common exclusions: 
• Theft by Owners: These bonds are designed to protect the business from employees, not from the business owners themselves. Sole proprietors or partners are typically excluded, though some policies can be extended to cover them under specific conditions. 
• Indirect Losses: Losses of future earnings, business disruption, or loss of reputation. Bonding chiefly insures direct monetary losses of money, securities, or property. 
• Accounting Errors: Omissions or sloppy errors that are not frauds or willful acts of dishonesty are usually not insured. 
• Acts by Employees with Known Dishonesty: If an organization continues to employ someone after learning that the person is dishonest, subsequent losses resulting from the employee can be excluded. Some policies even provide that the prosecution of the dishonest employee must occur for a claim to be successful. 

The Alarming Consequences Of Internal Theft 

The numbers tell a bleak story: employee dishonesty costs American businesses over $50 billion each year. This is not just a trifling annoyance; it can be devastating.  

The U.S. Department of Commerce estimates that fully 30 percent of business failure is the direct result of employee theft. Small businesses are especially at risk.

Working With The Various Types Of Fidelity Protection 

When discussing safeguarding a business against the threats within, the employee dishonesty bond is a foundation, but it is part of the larger context of fidelity protection.  

Grasping how it relates to other coverages, such as commercial crime insurance, ERISA bonds, and business service bonds, is vital to an effective overall risk management program. 

Employee Dishonesty Bond Vs. Business Service Bond 

An often-confused point involves employee dishonesty bonds and business service bonds. Both involve employee theft but indemnify different parties and protect against different situations. 

Feature Employee Dishonesty Bond Business Service Bond Protected Party The business itself (the employer) The client/customer of the bonded business Location of Theft From the business’s own premises or assets.  

At the client’s location (e.g., client’s home or office), Claim Payout is paid to the business owner to cover their losses. Paid directly to the client, the business is then required to reimburse the surety company.  

Purpose protects the business from its own employees’ dishonest actions. Protects clients from theft or damage by employees of the service provider. Common Use: Any business with employees that handle money or assets, cleaning services, home healthcare, plumbers, contractors, etc. 

How Is It Different From Commercial Crime Insurance? 

It is usually a type of fidelity bond, and it is either a standalone policy or a subsidiary part of a comprehensive commercial crime insurance policy. 

• Forgery or Alteration by non-employees 
• Theft, Disappearance, and Destruction of money and securities (inside and outside the premises) 
• Robbery and Safe Burglary 
• Computer Fraud (including by external parties) 
• Funds Transfer Fraud 
• Counterfeit Currency 
• Social Engineering Fraud (where employees are deceived into sending money) 

Special Cases: ERISA Bonds And Extended Coverage 

In addition to the general employee dishonesty bond, there are specialized fidelity coverages intended for special circumstances. 

One high-profile example is the ERISA bond. The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that establishes minimum standards for the majority of voluntarily sponsored retirement and health plans in private industry to give protection to individuals covered by these plans.  

As part of ERISA, any individual who deals with funds or other property of an employee benefit plan is required to be bonded.  

This is to imply that companies sponsoring retirement plans (such as 401(k)s) are legally mandated by the U.S. Department of Labor to get an ERISA fidelity bond. It’s different from standard employee dishonesty coverage because it insures the plan, not the employer’s own resources. 

• Volunteers: Charities, non-profit organizations, and community groups frequently rely upon volunteers. If a volunteer is responsible for money or assets, an extended dishonesty bond can be vital coverage. 
• Independent Contractors: Companies that commonly hire 1099 independent contractors (e.g., IT consultants, delivery drivers, project managers) might extend coverage to cover against their dishonest acts, particularly if they have access to sensitive data or valuable property. 

Board Members: For associations, non-profits, or even small corporations, board members often have substantial financial authority. Expanding bond coverage to board members can protect against their possible dishonest actions.

The Practical Guide To Your Employee Dishonesty Bond 

Having examined what an employee dishonesty bond is and how it relates to the larger context of protecting one’s business, let’s proceed to the practicalities: who requires this protection, what determines its expense, and how you can procure it and make a claim. 

Who Needs This Coverage? 

While nearly every company that employs workers can use an employee dishonesty bond, some industries and circumstances make this coverage especially vital: 

• All Companies with Employees: The plain fact is that employee theft can occur anywhere, no matter the industry or size. Three out of four employees confess to stealing from their employers on occasion. That one statistic alone demonstrates the across-the-board necessity of this protection. 
• High-Risk Industries:Retail: Companies that process significant amounts of cash and inventory are major targets for in-house theft. 
• Finance: Banks, credit unions, and investment companies have access to huge amounts of money and confidential financial information and are extremely vulnerable to fraud and embezzlement. 
• Healthcare: Medical offices, hospitals, and care facilities tend to manage patient billing, insurance claims, and costly medical supplies, providing opportunities for dishonesty. 
• Non-profits: With heavy dependence on donations and generally fewer internal controls, non-profits are open to theft of funds by employees or volunteers. 
• Janitorial Services & Home Care: Businesses whose workers are unmonitored while in clients’ homes or businesses are especially at risk for claims of theft, and so a business service bond (to insure the client) and usually an employee dishonesty bond (to insure the company’s own property) are essential. 

Factors Affecting The Price Of A Bond 

The price of an employee dishonesty bond, also known as the premium, is not a set price but instead a low percentage of the entire bond amount.  

It’s usually very reasonable, particularly when compared to the possible loss it safeguards against. There are several factors affecting this price: 

• Coverage Amount: The highest the bond will pay for a covered loss. Higher coverage limits, of course, result in greater premiums. Companies must calculate their likely maximum loss due to employee theft (e.g., the largest possible amount of cash or product an employee might actually steal) to set a reasonable coverage limit. 
• Employee Count: More workers typically translate to increased risk exposure, and hence, a higher premium. Some bonds charge per worker, while blanket bonds protect all employees for a one-time premium. 
• Risk of Industry: Those industries with a higher underlying threat of theft (i.e., those with lots of cash or valuable inventory) could possibly pay slightly more. 
• Internal Financial Controls: Companies with strong internal controls (e.g., segregation of duties, frequent audits, sound cash handling procedures) are considered lower risk by underwriters, which may lead to lower premiums. 
• Business Credit History: While never the main consideration for small bonds, for higher coverage levels or some bond types, the financial stability and credit history of the business can impact the premium. 

How To Get And Make A Claim On An Employee Dishonesty Bond? 

Getting an employee dishonesty bond is usually a painless process, particularly when you have the services of a surety broker. 

The process of getting a bond typically includes: 

1. Application: You’ll fill in an application form, giving information about your company, the number of staff, the amount of coverage you want, and your line of business. 
2. Underwriting: Your application is examined by the surety company, evaluating your risk profile against the above factors. 
3. Quote: You are quoted for your premium per year. 
4. Issuance: Upon your acceptance of the quote and payment, the bond is issued. The process is sometimes streamlined when going through a specialized agency, and many operators permit you to get an employee dishonesty bond online with a simple application. 

Filing A Claim: 

If an act of dishonesty takes place, the claims process usually goes as follows: 

1. Find of Loss: The moment you discover a loss because of employee dishonesty, it’s very important that you act soon. 
2. Notification to Surety: Report your surety company immediately. Most bonds require special time limits for reporting a loss (e.g., within 30-60 days of finding). 
3. Investigation: The surety company will investigate the claim. This generally means looking at your internal records, interviewing parties involved, and sometimes working with law enforcement. 
4. Proof of Loss: You will be required to submit extensive proof of the loss, such as documentation in the form of financial records, inventory reports, police reports, and any proof of the employee’s fraudulent act. 
5. Conviction Requirement (Critical Note): Certain employee dishonesty bonds, especially those operating more as a conventional surety bond, have the condition that the worker must be prosecuted under the law and convicted of the offense prior to payment of a claim. It is important to note this term in your individual bond contract. Other bonds, operating more as insurance policies, can pay out on adequate evidence of loss without prosecution. 

Payment: In case the claim is proved valid and all requirements have been fulfilled, the surety company will pay you for the covered loss, up to the limit of the bond.

Preventive Action: Outside The Bond 

While an employee dishonesty bond provides a crucial financial safety net, it’s not a substitute for robust internal prevention measures.  

The best defense against employee theft is a multi-layered approach that combines bonding with strong internal controls and a positive, ethical company culture.  

Implementing Strong Internal Controls 

Strong internal controls are your best defense against employee dishonesty. They make it more difficult for theft to go undetected and easier to find if it does. 

• Comprehensive Background Investigations: Perform extensive background investigations, including criminal record, employment verification, and credit reports (where legally possible and applicable to the job). This identifies those with a dishonest work history. 
• Segregation of Duties: Make sure that one employee does not have control of an entire financial transaction from beginning to end. For instance, the individual who records cash receptions is not the same one who deposits or prepares the bank statement reconciliation. This provides checks and balances. 
• Two Signatures on Checks: For major transactions, use two authorized signatures on checks. This provides another level of approval and keeps unauthorized disbursements at bay. 
• Scheduled, Surprise Audits: Make regular internal audits of financial records, inventory, and cash handling practices. Surprise audits can discourage fraudulent activities. Consider hiring an outside accountant for annual outside audits for increased objectivity. 

Fostering A Culture Of Honesty 

Aside from procedural controls, an ethical workplace culture can considerably diminish the risk of employee dishonesty. 

• Strong Theft Policies: Develop and directly communicate a zero-tolerance policy toward theft and fraud. All employees must know the repercussions of dishonesty. 
• Leading by Example: Management and leadership should always illustrate ethical conduct and honesty. Employees are more apt to follow high levels of integrity if they witness their leaders performing similarly. 
• Positive Work Environment: A good, respectful, and equitable work environment can decrease employee dissatisfaction, which is sometimes a root cause of theft. Competitive pay and benefits can also have an effect. 
• Anonymous Reporting Systems: Have a confidential and anonymous means for employees to report suspicious behavior without the threat of retaliation. This can be an internal hotline or an external service. 
• Accountability of Employees: Make employees responsible for their actions and decisions. Act on any violations of policy or trust quickly and consistently, making it clear that dishonesty won’t be accepted. 

To Sum Up! 

Employee dishonesty is a serious but commonly underappreciated risk for companies of all sizes. 

From the staggering yearly financial losses to the direct relationship with business failure, the effects of internal theft can be ruinous. But with the proper measures in place, your business can be bulletproof. 

An employee dishonesty bond is an essential monetary protection, preventing your firm’s assets—money, securities, and property—from the deceptive actions of those you trust.