Understanding the difference between a Fidelity Bond vs Surety Bond is essential for businesses and contractors. While both provide financial protection, they serve distinct purposes.
Companies use these bonds to manage risks, comply with legal obligations, or meet client requirements. Knowing how each bond works helps business owners make informed decisions and avoid financial loss.
Types of Surety Bonds
It is divided into two categories, depending on their purpose.
Contract Bonds
These guarantee that a contractor will fulfill contractual obligations, especially in construction projects. Common types include:
- Bid Bonds: Guarantee that a contractor will honor their bid and proceed with the contract if awarded.
- Performance Bonds: Ensure the contractor completes the project according to contract terms.
- Payment Bonds: Protect subcontractors and suppliers by guaranteeing payment for labor and materials.
Commercial Bonds
It covers a broader range of legal or regulatory requirements outside of specific contracts. Common examples are:
- License and Permit Bonds: Required by government agencies for businesses to obtain licenses or permits.
- Court Bonds: Required in legal proceedings, such as probate, guardianship, or appeal cases.
Both categories serve different functions but are essential for businesses to demonstrate compliance and financial responsibility.
What Are Fidelity Bonds
It protects companies against financial loss caused by dishonest acts of their employees. These include theft, embezzlement, forgery, or data misuse. Unlike Surety Bonds, Fidelity Bonds do not involve a third-party obligee. The company both buys the bond and benefits from it.
Common types are:
- Employee Dishonesty Bonds: Protect against theft or fraud by employees.
- Business Service Bonds: Cover losses suffered by a client due to dishonest employee actions.
- ERISA Bonds: Required by federal law to protect retirement plan participants from fiduciary misconduct.
This offers an internal safeguard against fraud, especially in sectors like finance, healthcare, and service industries.
Main Differences Between Fidelity Bond vs Surety Bond
Surety Bonds focus on external contracts, while Fidelity Bonds address internal risks.
Claims Process: How It Works
The claims process differs between them.
Surety Bond Claims:
- A claim occurs when a contractor fails to meet a contract obligation.
- The obligee files a claim with the surety company.
- The surety investigates the claim to determine its validity.
- If valid, the surety compensates the obligee and seeks reimbursement from the principal.
Fidelity Bond Claims:
- A claim arises when a business discovers a loss due to employee dishonesty.
- The employer submits a claim to the surety company.
- The surety reviews internal records and conducts an investigation.
- If the claim is approved, the business receives financial compensation for the loss.
Industry Examples: Who Uses Which Bond
Different industries rely on these bonds based on their risk exposure and operational needs.
- Construction Companies: Regularly use Contract Bonds, such as bid, performance, and payment bonds, to secure projects and meet client requirements.
- Financial Institutions: Often require Fidelity Bonds to protect against embezzlement, especially in roles that involve access to funds.
- Healthcare Providers: Use Commercial Bonds to comply with licensing regulations, and consider Fidelity Bonds for internal protection.
- Nonprofits: Choose Fidelity Bonds to safeguard assets from employee or volunteer theft, especially since insurance policies may exclude volunteers.
This industry-specific approach ensures businesses mitigate relevant risks effectively.
Fidelity Bond vs Surety Bond Cost
The cost of each bond varies based on risk, industry, and coverage amount.
Surety Bonds:
- Premiums range between 1% to 4% of the total bond amount.
- Factors include project size, industry risk, and the credit history of the principal.
- Larger and longer contracts tend to incur higher premiums.
Fidelity Bonds:
- Premiums depend on the number of employees, coverage limits, and the type of business.
- Industries with higher fraud risks may be required to pay more.
- Coverage can start at low annual premiums and increase with added protection.
Making the Right Choice for Your Business
Knowing the difference between a Fidelity Bond vs Surety Bond helps business owners mitigate risk. Use Surety Bonds when dealing with contractual or legal obligations to third parties. Use Fidelity Bonds when your concern lies with employee behavior and internal fraud.
Selecting the correct bond strengthens a business’s financial security and fulfills compliance obligations.
Looking for reliable bond solutions? At Avla we help businesses secure the right Fidelity and Surety Bonds quickly and with personalized support. Contact us today to get a tailored quote and expert advice from our team.
