Honesty Bond

An honesty bond is posted by an organization or professional to ensure the honesty and integrity of the bond issuer and/or its employees. An honesty bond insures policyholders against theft, fraud and other dishonest acts by employees. It is also known as a fidelity bond, an employee dishonesty bond or business service bond.

An honesty bond is an important way for most financial professionals to show they are bonded, which means there is protection against dishonest or illegal acts by employees. This bond, in turn, can be used to cover losses to the business or to consumers caused by dishonesty on the part of those employees. When used properly, honesty bonds can build trust with customers and invoke fiduciary responsibility among all employees.

Such bonds either protect a business from wrongdoing by its employees, a business's clients from theft by that business's employees or both.

One specific type of honesty bond is known as a blanket honesty bond, which offers coverage for any losses that might come about thanks to dishonesty from a company's staff: The maximum amount of the coverage is applied to any one loss, irrespective of how many employees are involved, with with the employer indemnified even if it's not possible to identify the guilty employee.

Other types, such as pension or ERISA fidelity bonds, are tailored toward specific people in an organization, such as those who administer pension plans. Essentially, both such bonds are a form of insurance to protect against embezzlement, forgery, destruction and other bad acts committed by employees.

As the U.S. Small Business Administration explains, "the term bond brings to mind an investment that returns interest income to the investor. But there are other types of bonds that have nothing to do with investing; they relate to business operations and function much like insurance."

To the question of whether a small business needs a fidelity or honesty bond, the SBA notes that, for companies with employees working on customer's premises, honest bonds "will provide coverage for employees' fraudulent or dishonest acts. For example, if you have a cleaning service, this bond will reimburse you if your employee steals from a customer. You can then use the proceeds to reimburse your customer."

With regard to ERISA fidelity bonds, "If your business has a defined benefit (pension) plan, you are required by tax law to have a fidelity bond equal to at least 10 percent of the assets. The maximum bond required is $500,000 ($1 million if the plan holds employer securities). No deductible is allowed in the bond and it must be in the name of the plan or trust (not the employer), or the bond must specifically state that the plan or plans (by name) are covered and that the general bond deductible doesn't apply per ERISA requirements. The bond protects against dishonesty by those handling the company's pension plan."