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When looking to purchase commercial crime insurance, business owners are often confused when their brokers start talking about fidelity bonds. Is there a difference between fidelity bonds and crime insurance? And if so, what is it?
The simplest answer to this question is that fidelity bonds and crime insurance are basically the same things. However, there are different types of crime insurance and different needs for crime insurance depending on your industry and the specific risks from which you are looking to protect your business by procuring the proper coverage.
Fidelity bonds are simply a type of crime insurance product that protects businesses from specific fraudulent acts. Let’s look at what those crimes are and what types of fidelity bonds are available to businesses.
What is a Fidelity Bond?
The easiest way to define a fidelity bond is to say that it protects businesses from crimes directly related to their employees’ misdeeds. That’s why fidelity bonds are often equated with crime insurance: because they protect the policyholder from crimes that another person committed.
There are three types of fidelity bonds that your business could potentially need:
Employee Dishonesty Bonds
This type of bond will protect you from fraudulent activities through which employees attempt to steal securities, money, or property from you. Any type of employee theft should be covered by an employee dishonesty bond.
Business Services Bonds
This type of bond doesn’t protect you from employee theft; it protects your customers and clients. If your customer has lost money, supplies, personal property, equipment, or anything else as a result of a fraudulent or dishonest act committed by your employee, these bonds will allow you to reimburse your customers for these losses and damages.
Having a business services bond is a great way of letting customers, clients, and partners know that you take crime very seriously and are committed to keeping their money, property, and other assets safe when interacting with your business in any other way.
If your business offers pension plans as part of your employee benefits program, then you are required by the Employee Retirement Income Security Act (ERISA) of 1974 to take out a fidelity bond for your pension plan trustees to provide coverage equal to at least 10% of the plan’s total assets.
This bond protects the money in that plan from the managers of the plan misusing funds in any way. ERISA requires you to take out a fidelity bond for the person who handles these funds to protect all of your employees participating in the pension plan from fraud and dishonesty, which includes acts of embezzlement, forgery, larceny, theft, and misappropriation of plan assets.
How do ERISA Bonds and Fiduciary Liability Insurance Differ?
Business owners often confuse ERISA fidelity bonds with fiduciary liability insurance because both are related to trustees and fiduciaries of your business. But there is a distinct difference between the two.
The ERISA fidelity bond protects the plan, while fiduciary liability insurance protects the people who are in charge of the plan in the case that something happens to these funds that’s not a direct result of acts of fraud or dishonesty on the part of the trustee.
Therefore, companies purchase fiduciary liability insurance to protect honest fiduciaries who could potentially be held liable for plan losses that resulted from an honest mistake they may have made.
On the other hand, an ERISA fidelity bond protects plan assets from fraudulent and dishonest acts committed by fiduciaries.
Commercial Crime Insurance
While fidelity bonds protect against very specific employee-related crimes, a commercial crime insurance policy can be put together to offer your business more complete and diverse coverage against criminal activities that could cost your business money.
One of the main differences between commercial crime insurance and most other insurance policies is that crime insurance covers financial losses stemming from a business-related crime, while most other insurance policies offer you coverage for legal costs related to claims that could be filed against your company for a plethora of reasons.
Commercial crime insurance basically reimburses the financial losses caused by the crime, as long as your policy covers that specific type of crime.
A proper commercial crime policy should cover financial losses related to employee theft, forgery, robbery, or electronic crime. And while both fidelity bonds and crime insurance do focus on employee crime, since it’s the hardest to prevent, a good commercial crime policy should also cover losses related to non-employee-specific crimes such as the following:
- Forgery or alteration of negotiable instruments, such as contracts and business checks
- Theft, destruction, or damage of money, property, or securities
- Computer hacking resulting in a transfer of funds to an outside account
- Social engineering fraud resulting in financial losses
- Receiving counterfeit money
- Fraudulent electronic transfers of funds
It’s also important to note that while crime insurance will cover some computer crimes that result in financial losses, most brokers recommend that a majority of businesses (especially technology companies) purchase cyber liability insurance as well.
Cyber insurance will cover legal costs and possible settlements and damages that need to be paid related to third-party losses that resulted from a cybercrime that targeted your business.
Loss Discovered vs. Loss Sustained
There are two scenarios in which a commercial crime policy provides coverage: loss discovered and loss sustained.
When you have a “loss discovered” form, your coverage applies to losses discovered during your policy period. That means it doesn’t matter when the act that led to the loss occurred, as long as the loss was discovered while the policy was active.
Conversely, coverage applies when a loss was actually sustained under a “loss sustained” form. Typically, “loss discovered” is the preferred form, since you’re covered even for past criminal acts as long as the losses were discovered while you were insured.
Filing a Claim
If you discover a covered loss has occurred, you should contact your insurer as soon as possible. Even if you are not yet certain of all of the details related to the crime, make sure you contact your insurer to let them know that there will be a claim in the works.
Best practices say that you shouldn’t wait longer than 30 to 60 days after recovery to provide your insurer with written notice of the covered loss. Generally speaking, businesses will have four to six months after the discovery to provide the insurer with valid proof of loss.
In many cases, commercial crime insurance policies provide some coverage to help businesses pay for forensic experts and attorneys to help them out in building a strong proof of loss, since having a detailed report of the crime committed and the loss discovered is both in the best interest of the insured and the insurer.
If you’re interested in learning more about fidelity bonds and commercial crime insurance, feel free to reach out to one of our expert brokers at any time to discuss your business risks and coverage options.
If you’re curious about the difference between general liability versus professional liability insurance, continue reading to learn about the nuances of each, how they’re similar, and how they differ.