Fiduciary liability insurance and fidelity bonds differ primarily in the nature of the acts that give rise to a covered claim. Fiduciaries are expected to act in the best interest of other parties who have entrusted them with the right to transact on their behalf. An unintentional failure to act within that duty as fiduciary gives rise to a claim. Fidelity bonds, on the other hand, cover specific acts of dishonesty, fraud and theft, which are considered intentional acts.
Fiduciary Liability Insurance
Fiduciary liability insurance covers individuals within an organization responsible for the management and oversight of various employee benefit plans and programs such as pensions, profit-sharing and savings, among others. These individuals face potential claims for mismanagement brought by plan members, which would then be covered under fiduciary liability insurance. The insurance is intended to cover the individuals directly in their capacity as fiduciaries and not just the organization.
Fidelity bonds are actually insurance policies covering losses from theft and fraud. These policies are more commonly known as employee dishonesty insurance or crime insurance. The policies are designed to cover specific acts such as theft, fraud or embezzlement and also specify who commits these acts, most commonly employees. This coverage reimburses the insured organization for the losses it suffers as a result of its employees' actions. It does not insure the employees for their illegal acts.
Differences Between Fiduciary Insurance and Fidelity Bonds
Fiduciary insurance and fidelity bonds differ in two main ways: who is insured and what types of acts are covered. A fiduciary insurance policy is a third-party liability policy that covers the insured for claims made against it by others. A fidelity bond is a first-party policy that covers the insured for claims it makes due to losses it has suffered. The fiduciary policy requires the insured to act in its best judgment and covers alleged, unintentional breaches of its fiduciary responsibilities. The fidelity bond covers the insured for intentional acts of theft against it.
Employee Benefit Plans
The most common use of both a fiduciary liability policy as well as a fidelity bond is in the context of an organization’s employee benefit plans. In addition to these two policies, a third insurance policy—the employee benefits liability policy—is used to fully cover the risk of providing and administering employee benefit plans. The employee benefits liability policy covers errors made in the regular course of administering the plans such as forgetting to enroll an employee or failing to submit a claim—exposures not covered by the other two insurance policies.