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What is a fidelity bond and why might it cause litigation?

On Behalf of | Aug 16, 2021 | Commercial Disputes |

The term fidelity bond often refers to a type of insurance policy that many companies will carry. The term can also refer to a type of surety bond.

No matter how one uses the term, companies that carry fidelity bonds are often in lines of business that require a higher level of trust with customers and investors.

Basically, a fidelity bond protects a company from liability from actions by rogue employees. An oft-used example of a rogue employee would be an executive who steals donations from a not-for-profit organization. That being said, any corrupt employee in any industry can do a lot of harm.

Depending on the policy’s terms, the fidelity bond may require the insurance company to repay a company for its losses at the hands of a dishonest employee.

It may also protect the firm from lawsuits in which a customer or investor claims the company is responsible for a dishonest employee’s behavior.

Financial services companies frequently need fidelity bonds and may even be required by law to have them. Other companies may also benefit from fidelity bonds, especially when company employees have access to or handle the property or money of others.

There may be a dispute over whether an insurance carrier owes payment

Unfortunately, sometimes insurance carriers will not agree to pay a claim under a fidelity bond. They may, for example, deny that there is any liability or say that the claim is simply not covered under the policy.

In other situations, an insurance carrier may offer a much lower settlement amount than the actual out-of-pocket losses a company or individual may have suffer.

Insurance carriers have an obligation to follow their agreements. New York law also requires that these carriers deal in what is called good faith with their customers.

A commercial dispute that involves malfeasance or dishonestly on the part of an employee can cause a serious drain on a Westchester County business’s resources. If a fidelity bond or policy is in play, the business may want to explore their options carefully.