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Fidelity insurance, also known as fidelity bond insurance and fidelity guarantee insurance, is a type of insurance designed to protect your business from the losses caused by your employees due to their acts such as dishonesty, theft or fraud. In other words, any loss arising out of the infidelity of the employees could be compensated by the fidelity guarantee policy. Employees who deal with cash and other valuables in an organization may engage in infidelity, leading to losses for the organization, and such losses should be compensated for the organization to regain its ground, without which it might need to shut down its business in certain situations. Various scenarios are covered under the fidelity guarantee policy, including the infidelity of the employees at the workplace or during their course of employment. For example, if an employee commits a dishonest act in the office by stealing cash, it would be covered under the policy. In another instance, if an employee who was sent to a customer's place might steal the customer's assets, the responsibility would lie with the employer to make good the loss suffered by the customer. In all such instances, a fidelity guarantee policy would compensate the losses suffered by the insured up to the sum insured limit mentioned under the policy.
It is appreciable to trust the employees, but at the same time, you should be vigilant and adopt robust risk management practices to reduce the losses that could arise from employee infidelity. Taking a fidelity guarantee policy to cover your employee's infidelity could be part of your risk management practices. The policy can be taken on an individual and a group basis. Sum insured can be selected on a per-employee basis or on a floater level. The sum insured should be selected based on the maximum loss from an employee or a group of employees. The premium in fidelity guarantee policy depends on the number of employees, their duties and responsibilities, robust audit measures in the organization, the sum insured requires, etc. One way to manage employee infidelity is to employ robust audit practices; the other is to have an FG policy. Having strong audit practices would prevent infidelity, whereas having an FG policy would safeguard the interest of the employer in case of the occurrence of a dishonest act.
Theft: The policy covers the losses or damages incurred by the insured due to theft committed by any insured employees. Losses arising from theft could be internal and external; internal losses are caused to the insured customer directly, whereas external losses are caused to the insured customers. Theft of any of the assets, cash or any other property from the insured location by an insured employee is covered under the policy. For example, if your employee is stealing a laptop from the office and selling it outside, then such loss would be compensated by the fidelity guarantee policy. Theft of customer property by any insured employee is covered under the FG policy. For example, if an employee has stolen cash from a customer's account in your bank, then the same would be compensated under the FG policy.
Embezzlement: The policy also covers the losses incurred by the insured when an employee embezzles the company's money. For example, your employee might utilize the funds collected from customers for their personal purposes by creating fake bills or receipts. Such embezzlement would be covered under the fidelity guarantee policy up to the sum insured limit.
Forgery: The fidelity guarantee policy also covers the losses arising from forgery acts committed by the insured employees. For instance, your employee may forge your signature on a check or document to gain at your loss. All such forgery-related losses will be covered under the fidelity guarantee policy.
As the name suggests, coverage under this policy is limited to the losses incurred by the insured due to fraud or dishonesty of an individual employee working in the organisation. This plan could be taken on a named basis for which the premium would be charged based on that employee's designation, roles and responsibilities and previous history. These plans are mainly useful for organisations with few employees who deal with cash and other valuables. For example, banks can take individual cover for their cashiers who are responsible for the cash tractions in the bank. Similarly, organisations can make individual plans for employees to deposit money in the bank, withdraw money from the bank, collect money from customers, etc.
The group cover covers the employer against the business losses caused by the fraudulent acts of employees in the organisation. Group cover comes on an individual and named basis, and the cover would be decided based on the employee's designation, responsibilities and position in the organisation. In group plans, employers can decide the sum insured for each employee depending on their position and job role.
Organisations need to be bigger to buy fidelity cover on a named basis. In such cases, organisations would opt for blanket cover covering all the designations, groups, categories, or teams in an organisation. For example, an employer might take a blanket cover for the entire accounts team, store-keeping team, clerical team, operations team, etc., without naming any particular employee in the policy. In the case of blanket cover, employers could take fidelity guarantee cover for all the employees working in a particular department or role. This helps the employer avoid the hassle of taking individual cover for every employee in the organisation. Since the policy is issued on a blanket basis and not on a named policy basis, the moral hazard is very high in such situations, and insurance companies usually handle such hazards by issuing such policies to well-established companies only. For example, an organisation might name a new person from the accounts team as the culprit and claim under the fidelity guarantee policy. This person was not there when taking the policy, which means that the insurer had not insured that person, but still, the organisation is trying to claim in that employee's name.
Floater cover refers to the plan with no per-person limit. One single sum insured would be floating among all the insured employees in the organisation. All the employees insured under the fidelity guarantee policy would be covered under this floater sum insured instead of per person sum insured. The minimum floater cover requirement in the fidelity guarantee policy is 5 employees. Floater coverage would help organisations save money as one sum insured would be floating among the employees instead of the per person sum insured, which is a bit costly compared to the floater policy.
Protection from internal risks
The main intention of taking a fidelity guarantee policy is to safeguard your interests from internal risks such as employee fidelity. Internal risks could cause considerable damage to organisations, and proper risk management practices should be implemented to handle such risks. For example, employees working in your organisation could commit fraud by stealing customers' money or the company's money or any other fraudulent activity that could affect the reputation and financial status of the organisation, and such activities cannot be contained in the first place by preventing them altogether. These kinds of activities would come out only after a certain period of time, during which time the organisation could have incurred a loss. Such losses could be compensated if a fidelity guarantee insurance policy is in place. The policy also covers the loss of physical assets such as property, stock certificates or any other assets of the organisation.
Protection to customer’s assets
The other important advantage of a fidelity guarantee policy is that it protects the assets that an organisation handles. For example, your employee may commit a dishonest act leading to losing the customer's property, which would be covered under the fidelity guarantee insurance policy. Causing internal damage is acceptable to most organisations, but external damage is considered seriously as this could affect the brand reputation, damaging the organisation's future prospects. For instance, assume that you are a bank dealing with a customer's money and one of your employees committed a dishonest act by siphoning off the customer's money to an overseas account. After a period of time, this issue came to light when the customer noticed the suspicious transactions in their account and complained to the higher authorities. Now, if there is a guarantee for the loss suffered by the employee, it would save the bank's reputation and reduce the damage caused by the event. The bank can give Such a guarantee by taking the responsibility on their shoulders or by taking a fidelity guarantee insurance policy, in which case the responsibility would be shifted to the insurance company.
Prevents financial crisis
The other benefit of having a fidelity guarantee policy is that it can prevent a financial crisis that an organisation could encounter due to the activities committed by a small portion of the employees. In some instances, such dishonest acts by employees would influence the organisation's entire business and might potentially lead to a financial crisis that could not be contained. In such circumstances, a fidelity guarantee policy would help companies handle any unexpected financial crisis.
Reputation
The other advantage of taking a fidelity guarantee insurance policy is that it safeguards your reputation by compensating the affected parties. Some businesses are run solely on their goodwill, and such goodwill could be tampered with by one dishonest employee act. If your customers are assured that you will compensate for the losses committed by your dishonest employees, then your reputation could be saved to a certain extent.
Customisation
Many businesses have different requirements and, at the same time, face different risks during their operations. Fidelity guarantee policy can be offered on an individual-name basis or a group basis, depending on your requirements. It can be a floater or blanket cover based on the customers' requirements. A Fidelity guarantee policy can be customised to suit your requirements and provide insurance coverage for the internal risks that could arise from the dishonest acts committed by your employees.
Employee check
The basic activity to be carried out before taking a fidelity guarantee policy is to check the history of the employees. It is important to analyse the previous history of the employees and then decide on taking the policy. Employees are usually subjected to employment checks before they are recruited into the organisation. Still, past behaviour is not representative of the employee's future actions; therefore, the employer should have a fidelity guarantee plan in place. Suppose it is known that the employee had committed a dishonest act in this employment or their previous employment. In that case, they should not be included in the fidelity guarantee policy. If the employer is aware of the employee's past history and still includes the employee in the list of employees to be covered without intimating the same to the insurance company, then insurance companies would deny the claim outright if similar acts are committed in the future.
Sum Insured required
In the case of a fidelity guarantee policy, the sum insured should be decided carefully when taking the policy. Once the policy is taken, altering the sum insured would be a cumbersome process. It is important to understand that the losses that could be incurred due to employee dishonesty could not be calculated beforehand, and sometimes, these losses could run into crores and may lead to the closure of the organisations. In such cases, the sum insured should be selected based on the employee risk. For example, the sum insured per employee should at least equal the amount of money they handle for a certain period. This certain period of time depends on the organisation's audit process. If the audit is carried out daily, then the minimum sum insured per employee should at least be the amount a particular employee handles daily. If the audit is carried out every week, the sum insured should be equal to the amount handled by the employee every week. This is if the sum insured is taken on a named employee basis, but if the sum insured is taken on a floater basis, the approach would be different. In most cases, organisations would go for floater sum insured as it would be difficult to estimate the loss caused by a single employee or a group of employees.
Safety measures
Safety measures such as regular audits, CCTV on the premises, proper invoices, etc, should be in place to contain the losses that could arise from the fidelity guarantee insurance policy. Safety measures could help reduce the impact of the losses, or they could even prevent the losses. For instance, if there is a daily audit in place, the maximum loss that could be reported is that of one day's transactions, whereas if there is a weekly or monthly audit in place, this value would be higher as the losses would pile up over a period of time. A robust audit process would help decrease the chance of employees committing dishonest acts. Other safety measures, such as internal controls, checks and balances, etc., would reduce the impact caused by the employee's infidelity and help reduce the premium charged for the policy.
Past Claims
Past claim experience is used to forecast future claims and is one of the important factors that should be considered when taking a fidelity guarantee policy. Past claims should be reported to the insurer when taking the policy, as this is a material fact which could influence the insurer's decision-making process. Insurance companies would generally ask for the past 3 years' claim data. If there was any claim related to the infidelity of employees or any such unreported events, it should also be mentioned in the proposal form. Hiding the past claims experience data would hamper the claim settlement process as it violates the basic principles of insurance. Past claims are those reported to the insurance company, and past events are those not reported to the insurance company. Any such infidelity act committed by the employee should be clearly mentioned in the applicant's proposal form.
Compare different plans
The best thing to do before taking any insurance plan is to compare different plans from different insurance companies. A Fidelity guarantee policy is a customisable policy that can be tailor-made to the customer's needs; therefore, the offerings would vary from one insurer to another. Even when all the offerings are similar, including the sum insured, one should compare the premium the insurer charges. A higher premium doesn't always mean better service; a lower premium sometimes means substandard service. One should analyse the claim settlement behaviour of the insurance company before taking the policy. Comparing gives you an overall idea of the features and premiums offered by various insurance companies in the market, and a better decision can be made accordingly.
Insurance Intermediary
When deciding, it is important to consult the insurance intermediary as a fidelity guarantee policy could be difficult to understand for everyone. An insurance intermediary could be an individual agent, bank, or insurance broker. Insurance intermediaries would play an important role when taking the policy and at the time of claim settlement. Therefore, selecting the best intermediary when taking the policy is important. Once selected, the insurance intermediary cannot be easily changed as it would be complicated and require cancellation and re-issuance of the policy. Considering all the factors, one should select an insurance intermediary who could explain the policy details clearly and provide seamless claim settlement service. Insurance brokers can provide you with multiple quotations from different insurance companies and help you select the best insurance plan.
Step 1: In case of a claim settlement, the insured must first inform the insurance company about the event or incident. In addition, the employer must take disciplinary action against the employee by terminating their services and preventing them from entering the office premises.
Step 2: Next, the insured should furnish all the relevant documents that could prove the incident's occurrence. Any act of infidelity must be furnished with relevant proof, along with the submission of claim documents and proof of loss to the company. Once the relevant documents are submitted, the insurance company will carry out the forensic audit. The forensic auditor will verify the claim and approve the claim amount. The claim amount does not include the insured's in-house and overhead expenses.
Step 3: After the approval, the insured should submit the required documents to process the claim amount. These documents include cancelled cheque leaves, KYC documents, etc. If the insurance company rejects the claim, the insured customer can appeal. It is important to note that the claim will be settled on a reimbursement basis, and the quantum of the claim will be decided by the forensic auditor.
Documents Required for Claim Settlement
A fidelity guarantee policy premium is usually at most 3% of the total coverage or the sum insured under the policy. The factors that could influence the premium in a fidelity guarantee policy are:-