Better Safe than Sorry – Fidelity Bonds

In this era of corporate transparency and more stringent auditing systems, you might think that your business is pretty well covered when it comes to crime in the workplace.

But employee dishonesty is always a possibility.  Depending on the nature of your business, you may want to consider purchasing fidelity bonds on some or all of your staff members to protect your company from employee crime.

Fidelity bonds, also known as employee dishonesty bonds, cover losses resulting from employee negligence or criminal acts such as theft, forgery, embezzlement, larceny and fraud.  The bonds typically cover those losses whether the employee acted alone or in collusion with others.

If purchased, a company will be covered up to the amount of the bond.  The insurer will then attempt to recoup the money from the employee.

Some industries are legally required to purchase fidelity bonds for their employees.  But beyond any legal requirements, you should at least consider purchasing bonds for employees who handle large amounts of cash or other assets.

It is estimated that one-third of all Canadian corporate bankruptcies are caused by employee theft.  And statistically speaking, it’s not new hires who steal. Longstanding employees understand the operation to the point that they can hedge the numbers in ways you can’t see.

There are several types of fidelity bonds available to suit various needs:

  • A Names Schedule Fidelity Bond, which covers employees that are named on the bond.  Coverage is available only when the employer’s loss can be directly traced to the individual.
  • A Blanket Position Bond, which covers all employees.  It automatically covers new employees and ends coverage when an employee resigns or is terminated.  This type of bond covers each employee involved in an incident up to the coverage amount.  For example, if you as an employer catch 10 dishonest employees and the bond amount was $10,000, you would be eligible for $100,000 in coverage.  You do not have to prove which employee was responsible for the loss.
  • Primary Commercial Blanket Bond, which is similar to the Blanket Position Bond but pays out the same amount regardless of how many employees are involved.  For example, if there are 10 employees involved in a loss and the bond amount is for $50,000, your company is eligible for $50,000.  If only the employee was involved, your company is still eligible for $50,000.

Once you decide you need coverage, you must determine which employees you want to cover.  Among those you might want to insure are employees who handle cash, securities, accounting records and investment funds.

Examine the extent of coverage and what acts are excluded.  Some of the standard coverage includes:

  • Employee dishonesty
  • Mysterious disappearance or destruction of money and securities
  • Off premises hold-up and robbery
  • Acceptance of counterfeit money
  • Cheque forgery

You can also add specialized coverage to include:

  • Computer fraud
  • Extension of credit based on a forged security
  • Extortion
  • Credit card forgery
  • Cost of investigating employee dishonesty loss

What Does the Insurer Investigate?

Before a fidelity bond is issued, the insurer investigates several aspects of your company and employees, including:

  1. The industry.
  2. The number of employees.
  3. The business locations.
  4. The procedures your company has in place to ensure the integrity of internal controls.  This includes segregation of duties amount staff members who handle cash, cheques or securities.  For example, an employee who issues cheques should not be reconciling bank chequing accounts.
  5. Employees’ history of theft or fraud.  Many insurers automatically exclude convicted felons.  However, individuals convicted of crimes that were not felonies are not necessarily excluded.  For example, a drunk driving conviction may not suggest that a person is likely to steal from the company.  But, some non-criminal factors may exclude an employee from coverage such as bankruptcy, an addiction, or major financial problems.

Bonding is complex, so get professional advice and allow plenty of time before you get the bond; the insurer will check and cross check information before it issues a bond.

If you have any questions, call Joseph A. Truscott at 905-528-0234 or email Joe at joetruscott@josephtruscott.com.