Despite the various business regulations and oversight agencies, contractual problems and fraud still exist in the business world. And these can trigger a huge financial loss for companies. Severe financial losses can cripple a company and result in a costly legal battle. However, companies can reduce their risk by acquiring a security/surety or fidelity bond.
Definition of a Bond
Bonds are a type of debt that involves interest payments and must be repaid to the entity that issued the bond. Businesses acquire bonds for various reasons, such to raise capital for investment purposes or to build new facilities. There are numerous types of bond. These can function as an insurance policy and be used to signify an agreement between two companies or investors.
Employers and corporations can face issues, such as theft by a employee or misappropriation of company funds. Although corporations and employers have policies to protect a company from losses, these policies might not cover theft by an employee. An employer or corporation must purchase supplementary insurance known as a fidelity bond. Also called crime insurance, fidelity bonds reimburse employers for damages or losses that can arise from theft, forgery, fraud or embezzlement by company staff.
Surety bonds, often called security bonds, are another type of bond insurance or credit. Surety bonds do not protect employers in the event of theft or fraud by employees. Rather, surety bonds are a promise to pay a recipient. These bonds are common between contractors and property owners, and surety bonds are often used in court cases. With surety bonds, an insurance or surety company acts as an intermediary between two parties. The surety company guarantees that one party will fulfill its contractual obligation to a second party. If a contract isn't fulfill, the second party recovers losses from the surety company.
Insurance companies issue coverage for fidelity bonds and surety bonds. Premiums vary, and the costs depends on the amount of coverage. With fidelity bonds, the number of employees covered under the insurance policy also impacts the premium. Before creating a fidelity or surety bond, agents typically request detailed information on the insurer's credit history, personal finances and the company financial records.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.