Fidelity Bonds
Not every threat to your company's money comes from outside. Fidelity bonds are designed to help protect your firm against financial loss caused by the dishonesty of your own employees, theft, embezzlement or the fraudulent manipulation of company or client funds.
For financial services firms handling client assets, evidence of fidelity coverage is often something regulators and institutional clients expect to see in place before doing business with you.
What is a fidelity bond?
A fidelity bond, also called crime insurance, is designed to reimburse your company for covered financial losses caused by dishonest or fraudulent acts committed by your own employees, theft of funds, forgery, embezzlement or manipulation of company records for personal gain, subject to the policy's terms, limits and exclusions. Unlike a surety bond, which guarantees performance on a contract to a third party, a fidelity bond is intended to protect your own company's assets.
For financial services firms, fidelity bonds are frequently a regulatory or contractual requirement, particularly for broker-dealers, investment advisors and any firm holding client funds in a fiduciary capacity.
Who should consider fidelity bond insurance?
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Broker-dealers, RIAs and asset managers holding client funds or securities
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Fintech platforms processing payments or holding customer balances
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Any financial services firm with fiduciary responsibility over client assets
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Firms required by a regulator, institutional client or contract to carry proof of fidelity coverage
What does fidelity bond insurance cover?
Depending on the policy, covered losses may include:
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Theft or embezzlement of company funds or property by an employee
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Forgery or alteration of financial instruments
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Fraudulent manipulation of computer systems or electronic records by an employee
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Loss of client assets held in the company's custody due to employee dishonesty
What does fidelity bond insurance not cover?
Fidelity bonds are not designed to cover:
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Losses caused solely by outside parties, without any employee involvement, unless a social engineering or funds transfer fraud endorsement applies
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Bodily injury or damage to tangible property (commonly addressed under General Liability)
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Professional negligence or honest errors in judgment that don't involve dishonesty (commonly addressed under E&O)
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Losses discovered after the policy's discovery period has expired
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Salary, commissions or benefits an employee was legitimately owed
Exact exclusions vary by policy form and insurer.
Real-World Examples
In June 2015, Ubiquiti Networks discovered that attackers had impersonated company executives and used fraudulent requests to convince the company's finance department to wire $46.7 million to overseas accounts. Through legal action, Ubiquiti recovered $18.6 million of that amount over the following years, according to the company's own SEC filings, leaving roughly $28 million unrecovered. The case is a useful illustration of why confirming social engineering coverage before an incident, rather than after, matters.
Source: Ubiquiti Inc., Form 10-K annual report, fiscal year 2022, filed with the U.S. Securities and Exchange Commission. Original incident reported via Form 8-K, August 2015.
Is a fidelity bond the same as E&O insurance?
No, though the two are often confused because both protect against financial loss.
Fidelity bonds
are designed for losses caused by dishonest or fraudulent acts, theft, embezzlement, fraud, committed by your own employees.
is designed for losses caused by honest mistakes, negligence or a failure to deliver a promised service, with no dishonesty involved.
As a general rule, a loss caused by intentional dishonesty at your company points toward a fidelity bond claim, while a loss caused by a mistake or an oversight points toward an E&O claim. Many financial services firms carry both, since the two are designed to cover different causes of loss and the coverages generally don't overlap. Visit our E&O Insurance page for more detail on that coverage.