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If you have come across a situation requiring a Fidelity or Surety Bond, you are probably already aware that they are a necessary component to many business transactions.  In order for some enterprises to conduct business in prudent manner, and to meet the obligations stipulated by many business contracts, a performance bond of some type might be required guaranteeing that a contract will be fulfilled, or an obligation will be maintained.  Ultimately, such bonds are necessary to provide protection and indemnification to all interested parties and they function as an important component of any business’s risk management strategy.

Fidelity and Surety Bonds are two categories of performance bonds that you be required to obtain.  A fidelity bond is designed to protect the insured against fraudulent acts, while a surety bond is written to protect the insured against a situation where one party to a contract fails to deliver on the promises made under that contract.

Fidelity Bonds

A person or entity that has responsibilities relating to the management of other’s money presents a fidelity exposure.  One of the best examples of this is the management of retirement plan assets under ERISA, which requires a Fidelity Bond

Fidelity bonds can also provide protection against theft, forgery, robbery and computer funds transfer committed by an employee of your organization.

Surety Bonds

Surety bonds are a common requirement in construction contracts, as their use will help to ensure that the terms of the contract are carried out as agreed.  They are also used for other types of performance related issues such as licenses and permits.  Additionally, probate or judicial bonds are used for fiduciaries and various types of court proceedings.

Surety bonds are also necessary for people who work in the public domain such as tax collectors, municipal leaders, treasurers and notaries.

If your business operates within any of the parameters noted above, it is important that you review any contracts that may have entered to ensure that you have the proper bonds in place.  Failure to maintain the proper bonding could result in a breach of contract claim or worse yet, it could leave you unprotected against fraud or contract performance issues.