Why Buy Crime Insurance Versus a Crime Bond?
Insurance and bonds provide coverage for different purposes. At first glance there does not seem to be much of a difference. Thus confusion between Crime Insurance (Fidelity Insurance) and a Crime Bond (Fidelity Bond) arises. A crime bond is substantially less expensive than crime insurance so why not just get a fidelity bond?
Crime insurance and bonds can be a requirement for doing business with an entity. So what is the difference?
A crime bond involves three parties:
- Obligee (the insured) – This is the party protected by the bond. They are usually the employer or a 3rd party doing business with the entity seeking protection from dishonesty or fraud. The obligee normally requires a bond for the obligee’s protection.
- Principal (the bonded party) – This is the individual or entity whose actions the bond covers. If the bonded party commits a dishonest act (like theft or embezzlement) the bond provides a guarantee of reimbursement to the obligee.
- Surety (the bonding company or insurer) – This is the party that issues the bond and guarantees reimbursement to the obligee if the principal commits a covered dishonest act. If the surety pays out a claim, they may then seek reimbursement from the principal.
Bonding companies do not plan on losing any money even if the bonding company pays for a party’s dishonest act. Typically the bonding company will only issue a bond if the bonding company believes that the principle has the assets to reimburse the bonding company. If the principal cannot provide proof of assets to the limit of the bond, the bonding company will refuse to issue a bond. Bonds typically only guarantee the actions of the principal. The bond provides no coverage for other parties that may commit dishonest acts against the obligee.
Crime insurance is a two party contract:
- The Insured (employer or business owner) – This is the party protected by the insurance for a dishonest act.
- The Insurer – The insurance company issues the insurance policy. If a covered dishonest act is committed than the insurer makes the insured whole. Depending on the crime policy endorsements crime insurance covers dishonest acts of employees and 3rd parties. Policy limits depend on the insured’s needs not the assets of a principle. Crime insurance policy limits can be in the millions of dollars. The insurer does not have an expectation of reimbursement from the dishonest party.
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
