Fiduciary liability insurance and fidelity bonding are easily confused. A fidelity bond is a contract under which the issuer of the bond, typically a surety company or an insurance carrier, agrees to reimburse a benefit fund for losses caused by theft, fraud, or other dishonest acts covered by the bond. A fidelity bond covers losses due to intentional acts to deprive a benefit fund of fund assets. By contrast, a fiduciary insurance policy covers losses caused by negligence or other acts or omissions not intended to cause the benefit fund to lose assets. But unlike fiduciary insurance which is discretionary, fidelity bonding is mandatory under ERISA.
Who must be bonded? The ERISA standard is that each person who handles plan assets must be bonded. The ideal bond not only names the plan as the insured and covers the plan’s trustees and employees, but also covers any natural persons employed by a vendor who would be required to be bonded. The reason is that fund assets are often handled by third parties. Euclid Specialty’s coverage is even broader, expanding coverage to “… any other natural person who handles Employee Benefit Plan assets, whether or not required to be bonded …” With this language, coverage is automatic not only for the employees of a plan vendor, but also for the employees of entities typically exempt for ERISA’s bonding requirements, such as banks and insurance companies. An employee of a non-fiduciary service provider would also be covered if they embezzle plan assets. The key provision to review is the definition of “Plan Official” or “Employee” to ensure that your bond meets the ERISA requirement.Read More