As a contractor, you’ve probably encountered surety bonds and likely know that their purpose is to protect the parties involved in a major project.
While most surety bonds serve as protection for the client, there are specific types like fidelity bonds that protect the business from its employees. They typically provide coverage for theft, property damage, fraud, the embezzlement of funds, and more.
In this blog, we’ll be breaking down a fidelity vs. surety bond in more detail so you can choose whichever is best for your needs!
An Overview of Surety Bonds
A surety bond is an agreement that guarantees the fulfillment of a contract or a task per industry standards and within a specific deadline.
In construction, you can think of them as a promise made by the contractor through the surety provider to the client that they will complete the contract. Acquiring surety bonds protect the client while also boosting the contractor’s credibility.
Failure to perform an obligation by the contractor would result in a bond claim, with the surety provider assuming the obligation if they cannot. The surety will then set up a reasonable payment plan with the contractor to reimburse the payment.
Common Types of Surety Bonds
Among the types of surety bonds, the most common are:
- Bid Bonds: These guarantee a contractor will see a project to completion according to the specifications outlined in the bid. If a contractor withdraws from the project after winning the bid, they will lose the money they used in the bond.
- Payment Bonds: These guarantee that the contractor will pay the subcontractors, vendors, and suppliers for the labour they’ve provided.
- Performance Bonds: Similar to a bid bond, these guarantee the contractor will complete the project as outlined in the contract within the deadline. Failure to comply would result in a claim against the performance bond as well.
So, What Are Fidelity Bonds?
While bid, performance, and payment bonds are obtained by an independent contractor or a business owner to protect its clients, a fidelity bond is a type of surety agreement that protects the business as well as its customers.
Also known as dishonesty coverage, fidelity bonds provide similar coverage to typical crime insurance policies—i.e. protection from burglary and theft—but the focus is on the business’s employees rather than outside criminals.
Some examples of these employee crimes include:
- Employee theft and fraud
- Embezzlement of funds
- Forgery, or when documents that were supposed to be used in good faith created a loss due to forged documents; and
- Losses due to counterfeit or unauthorized instructions, such as forged signatures, theft of customer information, and unauthorized use of bank account information
Some examples of fidelity bond types include:
| Type | Coverage |
| Employee Dishonesty Bonds | Protection against theft of money, securities, or property by employees |
| Business Services Bonds | Protection of your customers against dishonest action or theft committed by employees |
| ERISA Bonds | Protection against harmful action taken by a fiduciary as it pertains to employee benefits and/or pension plans |
Fidelity vs. Surety Bond: Key Differences
Now that we’ve covered the basics, let’s break down a surety vs. fidelity bond by laying out the key differences as direct comparisons.
Who They Protect
Typical surety bonds protect project owners from financial losses by ensuring that the contractor fulfills their contractual or legal obligations. If a claim is made, the surety bonds’ provider steps in to pay the project owner for the damages.
Meanwhile, fidelity bonds are designed to protect a business or an employer from financial losses stemming from dishonest or fraudulent acts committed by their employees. Businesses purchase them to protect themselves from their own people.
What They Cover
Surety bonds are specific and cover one step of the construction process at a time, which is why there are so many different types. Beyond the ones we discussed earlier, there are also commercial surety bonds, which include license and permit bonds.
Meanwhile, fidelity bonds provide coverage for risks that your business could potentially encounter. The scope of fidelity bonds is more narrow, with the types all being related to the different types of inappropriate actions employees can take.
How Claims Are Triggered and Handled
Surety bonds’ claims can be triggered when a contractor fails to fulfill a task that’s stipulated in the project contract. Once a suspected breach in contract is brought to the surety bonds provider, they will begin investigating the validity of the said claim.
If the claim is found to be valid, the surety bonds provider will step in to compensate the client if the contractor cannot currently do so. Then, the contractor will set up a reasonable payment plan with the surety provider to reimburse the amount paid.
Meanwhile, fidelity bonds are triggered when an employer experiences business interruptions and financial loss due to dishonesty, fraud, or theft committed by one of their employees. Once a loss is discovered, the employer must report it to the bond provider.
Similar to the surety bond claim process, the bond provider will conduct an assessment to determine the claim's validity and the extent of the financial losses incurred. If the claim is found valid, the surety will pay the employer for the loss of money or property.
Fidelity Bond vs. Surety Bond: Cost
Surety and fidelity bonds don’t have fixed costs. Rather, here are examples of some of the factors that will influence the prices of each:
Surety Bonds
Typically, the cost of a surety bond will reflect three factors:
- Premiums: These are based on your qualifications as a contractor, such as your creditworthiness, industry experience, and overall risk potential.
- Type of bond: Types often vary in terms of premiums as well; contract bonds will not cost the same as a payment bond or performance bonds, for example.
- Project Size and Duration: Bonds for larger, more lengthy projects are likely to cost more given the increased potential for accidents.
Fidelity Bonds
Conversely, fidelity bond costs are based on three different factors:
- Employee Risk: The number of employees, their roles within your organization, and their access to assets will all affect the price.
- Coverage Limits: As with insurance premiums, costs are also directly related to the amount of coverage you are seeking as a business.
- Industry and Business Size: Certain industries (such as construction) present more risks, as do larger businesses with more complex operations.
Mitigate Your Risks With KASE Insurance
There you have it: a thorough comparison of surety and fidelity bonds that covers everything from who they protect to what they cost. Both are great risk management tools that can protect you, assuming you get them from a reputable broker.
That’s us at KASE Insurance. We’re an award-winning brokerage based in Toronto that’s highly experienced in providing comprehensive surety bond and insurance packages to our clients across a wide variety of industries. We’ve got you covered.
Contact us today for more information and understand which bonds are right for your business!