Legal Definitions - fidelity and guaranty insurance

Fidelity and guaranty insurance is a specialized type of insurance that protects a business or organization from financial losses resulting from the dishonest acts of its employees. This coverage safeguards against various forms of internal misconduct, such as theft, embezzlement, forgery, or other fraudulent activities committed by an employee. Essentially, the insurance policy acts as a guarantee that the insurer will compensate the employer for specified losses up to the policy limits, providing a crucial safeguard against financial harm caused by internal dishonesty.

Here are some examples illustrating how fidelity and guaranty insurance applies:

• A small, independent bookstore employs several staff members who handle cash transactions, manage inventory, and process online orders. To protect against potential financial losses, such as an employee stealing money from the till or manipulating inventory records for personal gain, the owner invests in fidelity and guaranty insurance.

  • How it illustrates the term: If one of the bookstore employees were to systematically embezzle funds from daily sales over several months, the fidelity and guaranty insurance policy would cover the bookstore's financial loss, up to the policy's limits, thereby guaranteeing protection against the employee's dishonest actions.

• A large credit union has numerous tellers and loan officers who handle significant amounts of member funds and sensitive financial data daily. The credit union purchases fidelity and guaranty insurance to protect itself and its members from potential fraud or misappropriation of funds by an employee.

  • How it illustrates the term: Should a loan officer create fictitious loan accounts and divert the funds for personal use, or if a teller were to steal cash deposits, the credit union's fidelity and guaranty insurance would cover the resulting financial damages, ensuring the institution's stability and maintaining member trust.

• A non-profit charity organization relies on donations and grants to fund its programs. Its administrative staff and a few key volunteers are responsible for processing donations, managing bank accounts, and overseeing expenditures. The charity secures fidelity and guaranty insurance to protect against any financial misconduct by these individuals.

  • How it illustrates the term: If an administrative employee responsible for handling incoming donations were to divert a portion of the funds into a personal account, the charity's fidelity and guaranty insurance would cover the financial loss caused by this act of employee dishonesty, allowing the organization to continue its mission without significant financial disruption.