Fidelity Bond vs Surety Bond: Key Differences

The terms fidelity bond and surety bond are often used interchangeably, but they serve very different purposes. Understanding the differences between these two types of bonds is essential for both businesses and individuals who want to protect themselves against financial loss. This comprehensive comparison will help clarify what each bond does, who needs them, and how to choose the right one for your specific situation.

While both bonds offer financial protection, they are designed for distinct scenarios - one focused on internal employee behavior and the other on external contractual obligations. Whether you're a business owner looking to safeguard assets or a contractor trying to meet regulatory requirements, knowing the correct type of bond to secure can save time, money, and legal headaches. Choosing the wrong one could leave gaps in coverage or create unnecessary liabilities, making it crucial to understand their unique roles.

Let’s take a closer look.

 

What is a Fidelity Bond?

A fidelity bond is a form of insurance that protects a business from losses caused by dishonest or fraudulent acts committed by its employees. This type of bond is particularly important in industries where employees handle money, sensitive data, or valuable assets. Fidelity bonds are often seen as a safeguard against internal threats such as embezzlement, theft, or forgery.

Unlike a surety bond, a fidelity bond does not involve a third-party beneficiary. Instead, it directly protects the employer from acts committed by their own staff. Types of fidelity bond include: 

• Blanket Bonds: Cover all employees for losses due to dishonest acts, without naming individuals.
   
• Schedule Bonds: Specify coverage for named employees or designated positions only.
   
  • Named Schedule Bonds: Cover specific, individually named employees.
     
  • Blanket Position Bonds: Cover all employees in specific job positions.
     
• Employee Dishonesty Bonds: Protect against financial loss due to fraudulent acts by employees.
   
• ERISA Bonds: Required under the Employee Retirement Income Security Act to protect employee benefit plans from fiduciary fraud or theft.
   
• Employee Theft Bonds: Guard against employee theft of money, securities, or property.
   
• Financial Institution Bonds: Specialized bonds for banks and credit unions to protect against fraud, embezzlement, forgery, and similar crimes.
   
• Employee Dishonesty Insurance: Often used interchangeably with employee dishonesty bonds, but structured as an insurance policy.
   
• Forgery Coverage: Protects against losses due to forged signatures or fraudulent endorsements.
   
• Embezzlement Protection: Coverage for misappropriation or theft by employees.
   
• Fidelity Bond for Benefit Plans: A subset of ERISA bonds that secures retirement or health plans against internal fraud.

 

Key Features of Fidelity Bonds

The key features of fidelity bonds include:

• Employee Dishonesty Coverage: Fidelity bonds provide coverage against theft, forgery, embezzlement, or fraudulent financial transactions carried out by employees.
• First-Party Coverage: The bond protects the employer (the first party) rather than an external client or government agency.
• Optional Third-Party Coverage: Businesses can opt to extend their coverage to protect clients against losses caused by the bonded company’s employees.
• Customizable Limits: Bond limits can be tailored to the company’s risk exposure and number of employees.
• No Repayment Obligation: Unlike a surety bond, a fidelity bond does not require the insured business to repay the bond amount after a claim is paid.

 

Who Needs a Fidelity Bond?

A fidelity bond is essential for companies that are exposed to the risk of employee dishonesty. Common industries where these types of bond may be necessary include:

• Financial services and banking
   
• Accounting and bookkeeping firms
   
• Investment advisory businesses
   
• Healthcare providers, especially in-home care
   
• Cleaning services and security companies
   

Additionally, any business where employees handle cash, sensitive data, or valuable assets can benefit from this protection. Even small businesses with limited staff may face significant losses from fraudulent acts, making a fidelity bond a smart investment. Nonprofits, property management firms, and retail operations are also frequent buyers. Ultimately, if there's a risk of internal theft or embezzlement, a fidelity bond offers vital reassurance to both owners and clients.

If your employees regularly handle cash, financial instruments, or access client premises, it’s wise to consider starting your fidelity bond application.

 

What is a Surety Bond?

A surety bond is a three-party agreement involving:

1. Principal – The party required to obtain the bond (e.g., a contractor).
    
2. Obligee – The party requiring the bond (e.g., a government agency or client).
    
3. Surety – The company providing the financial guarantee.
    

A surety bond guarantees that the principal will fulfill certain obligations, such as completing a construction project or adhering to regulations. If the principal fails to do so, the obligee can file a claim. The surety will pay the claim, but the principal is ultimately responsible for reimbursing the surety.

 

Key Features of Surety Bonds

The key features of surety bonds include:

• Three-Party Agreement: Surety bonds involve a principal, an obligee, and a surety company, each with defined roles.
• Financial Guarantee: They assure the obligee that the principal will meet contractual or legal obligations.
• Reimbursement Requirement: If the surety pays a claim, the principal is legally obligated to repay the amount.
• Regulatory or Contractual Requirement: Surety bonds are often mandatory for licensing, public contracts, or court-related obligations.
• Wide Industry Use: They are used across many sectors including construction, auto dealerships, notary services, and more.

 

Who Needs a Surety Bond?

Many professionals and businesses need surety bonds to meet licensing, legal, or contractual requirements. Common examples include:

• Contractors – to secure licenses and bid on public projects
• Auto dealers – for state dealership licenses
• Mortgage brokers and lenders – to comply with financial regulations
• Notaries and private investigators – for licensing purposes
• Freight brokers – to meet federal BMC-84 bond requirements
• Court-appointed fiduciaries – such as guardians or estate executors
• Businesses managing retirement plans – requiring ERISA bonds
• Importers and customs brokers – to comply with federal customs regulations

 

Key Differences Between Fidelity Bonds and Surety Bonds

Here’s a side-by-side comparison to help you easily understand the key differences:

Aspect	Fidelity Bond	Surety Bond
Purpose	Protects employer from employee dishonesty	Guarantees principal’s performance or compliance
Parties Involved	Two (Employer and Insurer)	Three (Principal, Obligee, Surety)
Who is Protected	The business itself	The obligee (e.g., client or government)
Repayment Required?	No – employer keeps claim payment	Yes – principal must reimburse the surety
Typical Users	Financial firms, healthcare, service businesses	Contractors, licensees, professionals in regulated industries
Risk Type Covered	Internal (employee dishonesty)	External (contractual or legal non-compliance)

 

Choosing Between Fidelity and Surety Bonds

Choosing the right bond depends on your specific business needs:

• Choose a fidelity bond if your concern is internal threats, particularly employee dishonesty.
   
• Choose a surety bond if you need to demonstrate trustworthiness and compliance to a third party, such as a government agency or client.

Cost is another factor. While fidelity bond premiums depend on the number of employees and the level of risk, surety bond cost is usually based on the bond amount and the applicant’s creditworthiness. You can get a personalized estimate by requesting a surety bond quote.

 

Conclusion

While fidelity bonds and surety bonds both offer financial protection, they serve very different purposes and apply in different contexts. A fidelity bond protects your business from internal risks like employee theft, while a surety bond protects third parties from your failure to meet external obligations.

Understanding these differences will help you choose the right type of bond for your situation—protecting your business, complying with regulations, and building trust with clients and partners that can help establish your reputation.

If you're unsure where to start, consider reaching out for a surety bond quote or exploring your options with a fidelity bond application to ensure you're making the best decision for your needs.

 

Sources

Bureau of the Fiscal Service. (n.d.). Surety bonds: Laws & regulations. U.S. Department of the Treasury.
https://www.fiscal.treasury.gov/surety-bonds/laws-regs.html

U.S. Department of the Treasury. (n.d.). Surety bonds.
https://home.treasury.gov/taxonomy/term/7651

U.S. Department of Justice. (n.d.). Criminal Resource Manual: 1005. Embezzlement.
https://www.justice.gov/archives/jm/criminal-resource-manual-1005-embezzlement#:~:text=Embezzlement%20is%20the%20fraudulent%20appropriation,hands%20it%20has%20lawfully%20come.

U.S. Government. (n.d.). A–Z index of U.S. government departments and agencies. https://www.usa.gov/agency-index

National Association of Surety Bond Producers. (n.d.). What is fidelity?
https://surety.org/surety-fidelity/what-is-fidelity/

National Association of Surety Bond Producers. (n.d.). What is surety?
https://surety.org/surety-fidelity/what-is-surety/

U.S. Small Business Administration. (n.d.). Contracting guide.
https://www.sba.gov/federal-contracting/contracting-guide

Associated General Contractors of America. (n.d.). Construction data. https://www.agc.org/learn/construction-data

Lance Surety Bonds. (n.d.). Fidelity bond application.
https://www.lancesuretybonds.com/fidelity-bond-application

Lance Surety Bonds. (n.d.). What is a surety bond?
https://www.lancesuretybonds.com/learn/what-is-a-surety-bond

Lance Surety Bonds. (n.d.). Surety bond quote.
https://www.lancesuretybonds.com/surety-bond-quote

Lance Surety Bonds. (n.d.). Surety bond cost.
https://www.lancesuretybonds.com/learn/surety-bond-cost

Lance Surety Bonds. (n.d.). Fidelity bonds.
https://www.lancesuretybonds.com/fidelity-bonds/