Most people think of bonds as a form of investment that’s capable of returning a high interest to the investor based on market fluctuations.
But those are primarily investment bonds that have nothing to do with another form of bonds that are used in the business arena. Surety and fidelity bonds that are mentioned in the title of this article are a very important part of these business type bonds.
But before we delve right into the surety and the fidelity bonds in more detail, it’s time we highlight the description of these business bonds, first from a broader and general sense of view.
So, what are these so-called business bonds?
From the business point of view, bonds are a bit like insurance, but from a non-traditional perspective. They aid in backing up a promise that’s usually made at the start of a project or a collaboration or something similar.
In case the promise is breached for any reason whatsoever, the bond steps in for completion/fulfillment of the promise.
So that takes care of our “business bonds” part. Now let’s get over to the main topic.
What are surety and fidelity bonds?
These bonds are usually between 3 parties:
- The first consists of the one who’s required to perform the different contractual obligations (AKA the principal),
- The second consists of the party who’s receiving or the beneficiary of such an obligation (AKA the obligee),
- Then there’s the party who ensures that the bond is maintained until the completion of all terms and conditions mentioned in it (AKA the surety).
A surety bond usually comes with a penal sum. This is the maximum amount that would be paid by the surety in case the principal fails to complete all terms and conditions mentioned in the bond itself.
Fidelity bonds are a two-party type of insurance that protects against losses incurred as a result of employee misbehavior, embezzlement, theft or even fraud.
Regular insurance typically doesn’t cover against such misfortunes. Fidelity bond does. Hence, it can easily be said that these bonds do stay a step ahead in comparison to its immediate counterparts and should be considered as part of the overall company’s risk management.
When should you consider these bonds?
Certain circumstances do dictate the use of surety and fidelity bonds. Here are a few:
1) When you hire a contractor, manufacturer or a supplier
If you hire a contractor, a manufacturer or a supplier, you should evaluate the risks and consider a surety bond as inexpensive protection.
In case you find the contractor not delivering his/her promises or even failing to maintain all the clauses of your contract, the bond may come into play saving you from unanticipated financial hassles and hardship.
No matter whether the contractor goes bankrupt or not, the surety’s there to protect your resources. The surety’s obligated to see that the contract is honored between the two parties. Should the contractor fail or default on its obligations, the bond protects the obligee.
Safe and sound providing piece of mind.
2) When you have employees working
As an employer, you should make it a priority to consider a fidelity bond to cover unexpected fraudulent and dishonest acts of your employees.
Negligent acts of your employees can cause great damage to your company. Fidelity bonds help to protect a business from embezzlement from employees directly related to handling finances; property of clients/customers where your employee goes to provide services; and/or protect the assets of participants and beneficiaries’ retirement & benefit plans from the dishonest acts of an employee who are in a fiduciary capacity.
So, shouldn’t this be given serious consideration?
Both the surety and the fidelity bonds are a risk management tool that can come in handy for you in special circumstances. So, should you consider them?