Building Your Business What Is a Fidelity Bond? Fidelity Bonds Explained in Less Than 4 Minutes By Jean Murray Updated on January 31, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board In This Article View All In This Article Definition and Examples of Fidelity Bonds How Does a Fidelity Bond Work? Why Get Bonded? Photo: fizkes / Getty Images Definition A fidelity bond is a type of insurance that protects someone from losses caused by someone else, such as theft, forgery, fraud, or embezzlement. Fidelity bonds protect customers and others from harmful, unethical, or otherwise poor business processes. Definition and Examples of Fidelity Bonds A fidelity bond is a type of insurance that protects someone from losses caused by someone else. It’s like a guarantee that someone will do what they said they would do. Fidelity bonds insure against theft, forgery, fraud, larceny, or embezzlement. They don’t insure against poor work, injuries, or accidents. Fidelity bonds usually involve three parties: The person buying the bondThe person or entity that provides the bond (the insurance company)The person whose work is being insured For example, a service business could buy a fidelity bond from a bonding company to insure against losses due to an employee’s dishonesty. Note Don’t confuse fidelity bonds with bonds in the investment marketplace. Bonds sold on stock exchanges are debts, similar to IOUs from a business to bondholders. Types of Fidelity Bonds ERISA bonds are a special kind of fidelity bond created by the Employee Retirement Security Act (ERISA). ERISA requires that employee benefit and retirement plans must be covered by a fidelity bond. In the same way as a general fidelity bond would protect a company, an ERISA bond protects the plan from losses from fraud or dishonesty by plan administrators and others handling plan funds. Similar to ERISA bonds, nonprofit organization bonds are used by nonprofit organizations to protect themselves against dishonest employees. Fidelity Bonds vs. Surety Bonds Surety bonds are similar to fidelity bonds, but they are a promise to be liable for someone else’s debt, default, or failure. A surety bond includes three parties: The surety party, which guarantees the performance or obligation ofThe principal, the second party, toThe obligee or owner, the third party who buys the bond. Some types of surety bonds are court bonds, notary bonds, license and permit bonds, and public official bonds. How Does a Fidelity Bond Work? Fidelity bonds are insurance products, sold by insurance companies, and the fidelity bond process is regulated by state and local municipalities. To find out the cost of a bond or to buy one, contact any licensed insurance agent in your state. The cost of bonding depends on the amount of coverage you want. It also depends on your state’s minimum requirements for your type of business, the risk of loss, and your occupation. Note According to Insureon, a business insurance company, the median premium cost for small business fidelity bond coverage is $1,055 a year. Here are some examples of state regulations on fidelity bonds: Nevada regulates fidelity bonds for credit unions. Surety (insurance) companies must be state-approved by getting a certificate of authority before selling fidelity bonds to credit unions. The state also makes sure that the coverage is large enough to “provide proper protection” for the credit union’s customers. Maryland’s state regulations include licensing for security systems agencies and technicians. To obtain a license, agency applicants must have a fidelity bond of at least $50,000 to cover their staff who will provide security system services. Why Get Bonded? Some states and municipalities require bonding for specific occupations. For example, notaries are required to post surety bonds in 31 states. The bond doesn't protect the notary public; it protects the person who receives the notary’s services. Other types of bonds, like the ERISA bonds described above, are required by government agencies for individuals who handle funds or other property. Many service businesses get bonded because they can limit their liability for employee actions by purchasing this specific form of insurance. Buying a fidelity bond is also a good way to assure your customers that you have their interests in mind, since they know they’re protected from losses. Key Takeaways Fidelity bonds are a type of insurance that protects customers from losses due to fraud, dishonesty, or illegal actions by employees and others in positions of trust.Fidelity bonds involve an insurance company, a purchaser, and individuals whose actions may cause losses.States and municipalities regulate the sale of fidelity bonds, stipulating minimum coverage and requiring people in certain occupations to be bonded.Costs for fidelity bonds vary depending on state minimum requirements and the type of business or occupation. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Insureon. "How Much Do Fidelity Bonds Cost?" Nevada Administrative Code. "NAC-678.030 - Fidelity Bonds: General Requirements." Maryland Code of Regulations. "29.04.05.14 - Employer Bond or Insurance." National Notary Association. "Notary Surety Bonds: FAQs."