Know the difference: Surety Bonding and Crime Insurance Bonding

Author: Pamela Pyke, BPA, CIP

Part 1 - Demystifying Surety Bonding and Crime Insurance Bonding: Understanding the Differences

In the realm of risk management and financial protection, two terms often arise: surety bonding and crime insurance bonding. While they both serve as safeguards against potential losses, they address distinct aspects of risk and provide different types of coverage. Understanding the differences between these two forms of bonding is crucial for businesses and individuals seeking comprehensive protection.

Surety Bonding

Surety bonding primarily involves three parties: the obligee (the party requiring the bond), the principal (the party purchasing the bond), and the surety (the entity providing the bond). It serves as a contractual agreement to ensure that the principal fulfills their obligations to the obligee. If the principal fails to meet these obligations, the surety steps in to compensate the obligee, up to the bond's limit.

Types of Surety Bonds:

1. Contract Bonds: These bonds guarantee the performance and completion of a contract, typically in construction projects. If the contractor defaults, the surety may provide financial compensation to the project owner.
2. Commercial Bonds: These bonds encompass various types, including license and permit bonds, public official bonds, and judicial bonds. They ensure compliance with regulations and statutes, such as obtaining licenses or fulfilling legal requirements.
3. Fidelity Bonds: While often grouped with crime insurance, fidelity bonds are a type of surety bond that protects employers from employee dishonesty, such as theft or embezzlement.

Crime Insurance Bonding

Crime insurance bonding, on the other hand, focuses specifically on protecting against losses resulting from criminal acts. It typically covers financial losses due to theft, fraud, forgery, robbery, or other criminal activities perpetrated by employees, third parties, or both. Unlike surety bonds, crime insurance policies reimburse the insured for direct losses incurred as a result of covered criminal acts.

Types of Crime Insurance Policies:

1. Employee Theft Coverage: This policy reimburses the insured for losses resulting from theft or dishonest acts committed by employees. It provides protection for both tangible assets and financial instruments.
2. Forgery or Alteration Coverage: This coverage extends to losses arising from the forgery or alteration of checks, drafts, promissory notes, or similar financial instruments.
3. Computer Fraud Coverage: In the digital age, this policy safeguards against losses stemming from fraudulent electronic funds transfers, computer hacking, or unauthorized access to computer systems.? Note: Typically Computer Fraud Coverage does not cover Social Engineering type Frauds Push Payment Fraud, Vishing, Phishing) but insurer wordings differ and covers related to Computer Fraud and various forms of Social Engineering Fraud are also available on Cyber Insurance policies.

Key Differences

1. Nature of Coverage: Surety bonding focuses on ensuring contractual obligations are met, whereas crime insurance bonding provides indemnity for losses resulting from criminal acts.
2. Parties Involved: Surety bonds involve the obligee, principal, and surety, while crime insurance policies typically involve only the insured and the insurer.
3. Risk Addressed: Surety bonds mitigate the risk of non-performance or default by the principal, while crime insurance policies protect against losses from criminal activities.
4. Reimbursement vs. Indemnity: Surety bonds provide reimbursement to the oblige (typically the owner of the job) by the surety, whereas crime insurance policies indemnify the insured for direct losses incurred due to covered criminal acts.

Part 2 – The Third Party Extension on a Crime Insurance Bond

Full Disclosure – I used Open AI to generate part 1 of this article and then edited same.? I also tried to use open AI to explain the third party extension on a crime bond but was not as successful in generating accurate/meaningful content.

A Fidelity or Crime bond covers the insured for employee dishonesty resulting in a loss or money or property.? The third party extension on a crime bond operates to extend the coverage to the clients of the insuredIn sum it covers theft by your employees from your clients including fraud and theft of money and/or property.

The coverage is sometimes called the ‘janitorial extension’ because janitorial firms often need crime cover that extends to theft by employees from the janitorial firm’s clients.? It is also referred to as client coverage (a term I prefer). Over time, many business operators have recognized the need for this type of coverage.? Ideally any service you employ that has access to your money or property should have this coverage. ?

Many firms should avail themselves of this coverage.? An example would be an IT Consultant who works in the financial industry or a property manager handling the funds of his/her clients.? In truth many firms only purchase this coverage when contractually obligated to do so. ?

Conclusion

Surety bonding and crime insurance bonding serve distinct purposes within the realm of risk management and financial protection. While surety bonds ensure contractual obligations are met, crime insurance policies provide coverage for losses resulting from criminal acts. Understanding the differences between these two forms of bonding is essential for businesses and individuals to make informed decisions regarding their risk mitigation strategies and financial security. ?

Finally, consider adding client coverage to your crime bond if your employees have access to your clients money or property.