Key Differences Between Surety and Fidelity Bonds

Business bonds can play a critical role in your organization’s financial stability and future potential. You’re likely aware of the general importance of appropriate risk management and loss control measures, but your company’s specific need for bonds should be top of mind. Understanding the various types of bonds and how different versions may address your unique risks and exposures can make all the difference in situations that might otherwise lead to financial ruin.

How Do Surety and Fidelity Bonds Work?

Bonds come in many forms, many of which fall under the category of surety bonds. Insurance companies often sell these financial instruments and may include a vast array of subclassifications, including contract bonds, construction bonds, license and permit bonds, and performance bonds.

• Surety bonds generally entail an agreement among the following three parties:

• The principal, such as your business, is responsible for purchasing bonds if the obligee deems them necessary.

• The obligee, such as your client, determines if surety bonds are necessary to protect their financial interests.

• The surety, such as your insurance company, underwrites and maintains the bonds.

Although the exact parameters of surety bonds can vary, they generally function by cultivating a means for the obligee to recover financial losses for which the principal is at fault. This could be due to an inability to fulfill contractual obligations or a failure to adhere to industry regulations and legal requirements.

• Fidelity bonds are another subtype of surety bonds and may also be referred to as honesty bonds. These loss control tools establish your company as the principal and clients whose property or sensitive information you may have access to as the obligee. These bonds are primarily focused on ensuring clients and customers can recover losses arising from dishonest, fraudulent or criminal acts, such as if your employees commit the following:

• Theft

• Burglary

• Property damage

• Fraud

• Forgery

• Illicit funds transfers

We’re Here to Help

Contact Bama Insurance Services today to learn more about surety and fidelity bonds and ensure your business has appropriate loss control measures in place.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.