Fidelity guarantee

From CEOpedia | Management online

Fidelity guarantee (or fidelity bond) - is a type of insurance that protects employers from any financial losses they may suffer as a result of the dishonest behaviour of their employees. The insurance policy can cover all employees (e.g.blanket bond) or separate individuals. Depending on the scope of the contract, the insurer requires full information about the procedure the organization implements when recruiting and selecting new employees; it usually reserves the right to decline inclusion of a specific person in the contract without any explanation[1].

Protection against financial loss

Companies suffer significant financial losses each year as a result of crimes committed by employees. It has been recently reported that fraud is aggravating due to the increasing use of electronic data and vulnerability of assets transfer operations. Thus, the financial losses have become more difficult to prevent as well as more struggling to recover from. Fidelity guarantee insurance is mostly applied in the corporations where employees, having a constant access to cash, stocks or other material assets, are prone to be involved in fraud and embezzlement. The era of computer crime and data leaks also defines fidelity guarantee insurance as a risk management lever[2].

Сoverage conditions

Insurance companies have the right to define specific guidelines for the company's procedure of hiring employees. Their service is valid until the company's management remains the same. To meet these requirements and continue benefit from the coverage, companies may have to carry out reference checks, checks of criminal records, and previous employee enquires for new employees. Companies are also required to inform the insurance company prior to changing employee duties or position. Otherwise they may face suspension of the insurance agreement[3].

Types of fidelity guarantee insurance

There can be distinguished four types of fidelity guarantee[4]:

  1. Individual Policy - this policy concerns an individual employee and covers only for his/her wrongdoings for specific amount of costs. When the fraud is revealed, the crime should be reported to the insurance company within 24 months.
  2. Collective Policy - the collective policy concerns a group of employees. Depending on the number of employees and their duties/positions, the insurance company calculates the amount of guarantee provided.
  3. Floater Policy - follows the same principle as collective one, as it covers a group of employees as well. However, the floater policy defines an even amount of guarantee for the group, instead of different amount depending on each employee's position and duties.
  4. Blanket Policy (also blanket bond) - provides guarantee for a group of employees excluding names of the people under coverage. The amount of guarantee depends on each employee as well as on the amount of financial loss. Only companies with well-established corporate culture and control are eligible to blanket policy insurance

Suspension of fidelity guarantee

Fidelity guarantee insurance has a range of exclusions:

  • When the company changes the nature of the business;
  • Unreported or unexplained changes in positions or responsibilities of employees;
  • Losses that are unsupported by evidence;
  • Unexplained expenses or losses in accounting records;
  • Losses of third parties;
  • Losses resulting from blackmail or extortions.

Businesses that are most eligible to fidelity guarantee insurance[5][6]:

  1. Retailers: due to the large number of cashiers involved in business and cash registers unobserved
  2. Restaurants and cafes: the high turnover and employee flow make it difficult to control

Insurance claim procedure

The insurance claim procedure is presented below[7]:

  1. The company must follow immediate steps against the guilty employee for obtaining the financial recovery. Depending on the case, there may be also other disciplinary action required.
  2. The company must provide evidence of the "act of infidelity" committed by the particular employee under policy.
  3. The company must not be liable any other security guarantee or insurance that covers the same loss.
  4. The policyholder must provide a "proof of loss" to the insurance company as well as carry out the forensic audit

Examples of Fidelity guarantee

  • Blanket bond - A blanket bond is a type of fidelity guarantee that covers all employees of an organization. It covers all losses resulting from theft, embezzlement, and any other dishonest activities of employees. It is important to note that blanket bonds are not comprehensive and may not cover all losses.
  • Employee dishonesty bond - Employee dishonesty bonds are an insurance policy that covers financial losses caused by dishonest acts of employees. This type of bond usually covers losses from theft or embezzlement of money, securities, or other property belonging to the organization.
  • Forgery bond - Forgery bonds are insurance policies that protect organizations from financial losses caused by forgery or alteration of checks, money orders, and other negotiable instruments. It is important to note that forgery bonds usually do not cover losses from theft or embezzlement.
  • Bankers’ blanket bond - Bankers’ blanket bonds are a type of fidelity guarantee that covers losses resulting from theft, embezzlement, and any other dishonest activities of employees of a banking institution. This type of bond usually covers losses resulting from a breach of trust by employees, including but not limited to, the misappropriation of funds, the misuse of entrusted property, and the unauthorized trading of securities.

Advantages of Fidelity guarantee

  • Fidelity guarantee provides a guarantee to employers against any financial losses caused by the dishonest or fraudulent behaviour of their employees.
  • It helps to reduce the risk of theft and other forms of financial loss caused by employees.
  • The insurance policy can be tailored to meet the specific needs of an organisation, meaning it can cover all employees (e.g. blanket bond) or just certain individuals.
  • It gives employers peace of mind that they are protected against any financial losses.
  • The insurer requires detailed information about the recruitment process, which helps to ensure that the right people are employed.
  • It can help to improve the reputation of the organisation as customers and other stakeholders are more likely to trust an organisation that has taken steps to protect itself against fraud and theft.

Limitations of Fidelity guarantee

  • Fidelity guarantee does not cover losses caused by an employee’s negligence or incompetence.
  • The policy does not cover losses incurred by an employee as a result of their own illegal activities.
  • Fidelity guarantee does not protect against losses due to cyber-attacks or other malicious actions by third parties.
  • It does not generally cover losses caused by errors or omissions in data processing or record keeping.
  • The policy does not cover losses that result from the failure of an internal or external control system or process.
  • The policy might not cover losses incurred due to the failure of an employee to follow the organization’s policies and procedures.
  • The insurer may also exclude certain types of losses from the scope of the policy.

Other approaches related to Fidelity guarantee

  • A key approach to fidelity guarantee is to ensure that hiring processes are stringent and that employees are properly vetted. This could include background checks, references checks, and interviews to ensure the employee is honest and reliable.
  • Another approach is to have a code of conduct in place that employees must adhere to. This should include rules and regulations that employees must abide by, and any violations of these rules should be punished accordingly.
  • A third approach is to have a system in place to detect any fraudulent activities or behaviour. This could include regular audits, monitoring of financial transactions, and access to confidential information.
  • Lastly, employers should also ensure that their employees are aware of the consequences of fraudulent activities. This could include training sessions, seminars, or other forms of communication that clearly outlines the risks and penalties associated with any dishonest behaviour.

In summary, fidelity guarantee is a type of insurance that protects employers from financial losses due to the dishonest behaviour of their employees. To ensure maximum protection, employers should implement a range of approaches, such as stringent hiring processes, a code of conduct, a system to detect fraud, and communication about the risks and penalties associated with fraudulent activities.


  1. Sethi J., Bhatia N. (2012), p. 276
  2. Keeley M. and Duffy S.(2019), p. 75
  3. Keeley M. and Duffy S.(2019), p. 75
  4. Sethi J., Bhatia N. (2012), p. 276
  5. Fisher L., Andersen M., (2017), p. 9-58
  6. Gerathewohl K. (1980), p. 813
  7. Fisher L., Andersen M., (2017), p 5-3

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Author: Kamil Piszczek