Definition
A Fidelity Bond, also known as an employee dishonesty bond, is a form of insurance that protects employers from financial losses caused by fraudulent activities or dishonest acts of their employees. This type of bond is commonly used in real estate to safeguard assets, money, or other valuable property managed or handled by employees.
Examples
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Property Management Company: A property management company hires multiple employees to collect rent, handle tenant disputes, and maintain properties. To protect the assets from potential fraud or embezzlement, the company secures fidelity bonds for its employees.
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Real Estate Investment Firm: An investment firm deals with substantial financial transactions and hires accountants and financial managers to oversee funds. To mitigate the risk of internal theft or fraud, the firm purchases fidelity bonds on these key personnel.
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Landlord’s Protection: A landlord hires a resident manager who is responsible for collecting rents from tenants. To hedge against the risk of the resident manager potentially embezzling collected rent, the landlord takes out a fidelity bond on the manager.
Frequently Asked Questions (FAQs)
What is covered by a fidelity bond?
A fidelity bond covers financial losses resulting from dishonest or fraudulent acts by employees such as theft, embezzlement, forgery, or fraud in handling cash, securities, or other valuable properties.
Who needs a fidelity bond?
Any employer, including real estate companies, property managers, investment firms, and landlords who have employees handling significant valuables or funds, should consider purchasing a fidelity bond as a protective measure.
How does a fidelity bond benefit employers in real estate?
Fidelity bonds provide real estate employers with a mechanism to recover financially from losses due to employee dishonesty, ensuring business stability and maintaining trust with clients and tenants.
Is a fidelity bond the same as other business insurance?
No, a fidelity bond specifically protects against losses resulting from dishonest acts by employees, whereas general business insurance may cover broader risks, including property damages, liability, and other operational risks.
Can a fidelity bond cover volunteer workers?
In some cases, yes. Some fidelity bonds can be extended to cover volunteers who handle valuable property or funds, depending on the policy’s terms and conditions.
Surety Bond
A surety bond is a three-party agreement where the surety company assures the obligee (usually a project owner) that the principal (typically a contractor) will perform a contractual obligation.
Business Interruption Insurance
Business interruption insurance compensates a business for lost income during periods when it cannot operate due to a covered event, such as natural disasters or other disruptions.
Liability Insurance
Liability insurance provides protection to businesses against legal claims resulting from injuries, property damages, or negligence by the business or its employees.
Property Insurance
Property insurance offers coverage for physical damage to a business’s buildings, equipment, and inventory due to events like fire, theft, or natural disasters.
Online Resources
References
- Investopedia. “What is a Fidelity Bond?” Investopedia
- National Association of Insurance Commissioners. “Fidelity Bonds.” NAIC
- Small Business Administration. “Fidelity Bond Information.” SBA
Suggested Books for Further Studies
- Insurance: Concepts & Coverage: Property & Liability by Marshall Wilson Reavis III
- Commercial Real Estate Investing for Dummies by Peter Conti and Peter Harris
- The Complete Guide to Real Estate Finance for Investment Properties by Steve Berges
Real Estate Basics: Fidelity Bond Quiz
### What is the primary purpose of a fidelity bond?
- [ ] To prevent employees from committing fraud.
- [ ] To minimize business tax liabilities.
- [x] To protect employers from financial loss due to employee dishonesty.
- [ ] To ensure employees are skilled in handling funds.
> **Explanation:** The primary purpose of a fidelity bond is to protect employers from financial losses resulting from dishonest acts committed by employees.
### What types of employees should typically be covered by a fidelity bond?
- [ ] Only senior management positions.
- [ ] Employees involved in advertising.
- [ ] All employees regardless of role.
- [x] Employees handling cash, securities, or valuable property.
> **Explanation:** Fidelity bonds are particularly essential for employees who handle significant valuables or funds, mitigating the risk of fraud or theft.
### From where can a landlord purchase a fidelity bond?
- [ ] General retail stores.
- [ ] Local municipal offices.
- [ ] Financial institutions.
- [x] Insurance companies.
> **Explanation:** Fidelity bonds are purchased from insurance companies, where employers can obtain appropriate policies to fit their needs.
### Can fidelity bonds cover volunteers?
- [x] Sometimes, depending on the policy.
- [ ] No, only paid employees are covered.
- [ ] Yes, all volunteers are always automatically covered.
- [ ] Only volunteers in non-profits.
> **Explanation:** Depending on the terms of the policy, fidelity bonds can sometimes be extended to cover volunteers who handle valuable goods or funds.
### Why might a property owner choose to obtain a fidelity bond for employees?
- [ ] To ensure high employee performance.
- [ ] To encourage employees to handle money responsibly.
- [x] To protect against financial loss from potential theft or fraud by employees.
- [ ] To comply with standard rental agreements.
> **Explanation:** A property owner obtains a fidelity bond to safeguard against financial losses that may arise due to dishonest actions by employees handling rents or property.
### Do fidelity bonds replace the need for other types of business insurance?
- [x] No, they specifically cover employee dishonesty.
- [ ] Yes, they encompass all business risks.
- [ ] Yes, as long as employees are insured.
- [ ] No, but they serve as the main insurance type.
> **Explanation:** Fidelity bonds specifically cover employee dishonesty and do not replace the need for other types of business insurance which cover broader risk categories.
### How does a fidelity bond increase trust between an employer and their clients?
- [ ] By ensuring fast service delivery.
- [ ] By decreasing service fees.
- [x] By providing financial protection against dishonest acts, thereby assuring clients of organizational integrity.
- [ ] By extending coverage to clients’ finances.
> **Explanation:** A fidelity bond increases trust as clients are assured that the business is safeguarded against internal fraudulent activities, providing a layer of financial security and integrity.
### What is another common term for a fidelity bond?
- [x] Employee dishonesty bond.
- [ ] Liability bond.
- [ ] Mortgage bond.
- [ ] Real estate trust bond.
> **Explanation:** Another term for a fidelity bond is "employee dishonesty bond," underlining its purpose to insure against dishonest acts by employees.
### Is purchasing a fidelity bond mandatory for all businesses?
- [ ] Yes, it's mandated by federal law.
- [ ] Yes, but only for public companies.
- [x] No, it's optional but highly recommended.
- [ ] No, only for international businesses.
> **Explanation:** Purchasing a fidelity bond is optional. It is not legally mandated but is highly recommended for businesses dealing with significant assets or funds.
### Which organization frequently involves or requires fidelity bonds to safeguard its operations?
- [ ] Federal Housing Administration (FHA).
- [ ] Real estate agencies exclusively.
- [x] Property management companies.
- [ ] Local chambers of commerce.
> **Explanation:** Property management companies frequently require fidelity bonds to safeguard against losses from potential theft or fraud by employees handling rented property and collected funds.
