Commercial Insurance - What are Insurance Bonds
Contract, Court and Federal Bonds
Bonds are generally divided into two types, Fidelity Bonds and Surety Bonds. Both types differ from insurance in that they always have three parties central to the contract: a Principal (the entity or person that might cause the loss), an Obligee (the entity that collects under the bond, should the principal cause a loss) and a Surety (the entity that pays the loss, such as an insurance company).
What are Fidelity Bonds
Fidelity Bonds are technically a form of Surety Bonds, but are usually considered a distinct product. They are issued as a guarantee against loss due to employee dishonesty. As such, they are an important part of a company's insurance program, since they cover areas not covered in the company's Liability and Property Coverages. For many businesses, an employee's dishonest act is a principal area of their insurable risks, and Fidelity Bonds can provide that protection
Fidelity Bonds come in several forms, including:
- Individual Bonds, in which an individual employee is bonded. Individual Bonds are not standardized. They can be easily used for unusual situations or activities, and can be specially scripted.
- Scheduled Bonds, in which individual positions (called a Positions Schedule Bond) or named individuals (called a Name Schedule Bond) are covered. An example of this would be all branch personnel or tellers in a specific bank.
- Blanket Bonds are used to cover all employees, providing the most complete coverage of the three types. The coverage is especially valuable due to the latitude given in demonstrating a covered loss. The employer doesn't need to show that a specific covered employee caused a loss. If the employer can show that an employee must have caused the loss then that loss will be covered.
- Discovery Bonds allows a first-time buyer of Fidelity Bonds to protect against undiscovered loss that occurred before the bond was issued. If you, as an employer, have just realized the need for a Fidelity Bond as part of your insurance coverage, you should also consider buying Discovery period coverage.
What are Surety Bonds
Surety bonds are issued to cover an extremely wide range of actions and situations. They are issued by surety companies, and can be classified into one of the following areas:
- Contract Bonds
- Court Bonds
- Federal Bonds
- License and Permit Bonds
- Public Official Bonds
- Other/Miscellaneous Bonds
