Fidelity insurance

Category: Crime and fidelity · Reviewed by the Apex broking team · Last reviewed 2026-08-22 · ~6 min read

Definition and scope

The insuring clause of a fidelity section responds to direct financial loss sustained by the insured resulting from a dishonest or fraudulent act committed by an employee, acting alone or in collusion, with the manifest intent of causing loss to the insured and of obtaining an improper financial gain for the employee or another party. Each of those elements does work, and each is a place where claims are lost.

The definition of “employee” is the first thing to read. It usually captures permanent and temporary staff and directors acting in an employed capacity; it may or may not capture contractors, agency workers, secondees, volunteers, trustees, and staff of an outsourced service provider. Businesses that run on contractors frequently discover the gap after the event.

What it pays for, and what it does not

Fidelity cover is directed at direct loss: cash, negotiable instruments and property taken, funds transferred out, invoices diverted, stock stolen. It normally excludes indirect and consequential loss — lost profit, business interruption, reputational harm, the cost of re-tendering a contract, the cost of investigating what happened beyond any express investigation cost extension, and the value of information as opposed to the money it was used to obtain.

It also excludes trading losses. An employee who conceals unauthorised positions, or who takes speculative risks that go wrong, causes a loss that is real but is not, on most wordings, a fidelity loss unless the employee personally profited in the manner the insuring clause requires. Salary, commission and bonus improperly paid are dealt with variably, and expense fraud is often subject to a small sub-limit or excluded.

Fines, penalties and punitive damages are outside cover, and loss discovered only through an inventory computation or profit-and-loss calculation is commonly excluded or restricted — a point that matters where stock shrinkage is the symptom rather than an identified act.

Discovery, not occurrence

Fidelity and crime policies are generally written on a discovery basis. The trigger is the discovery of a loss during the policy period, regardless of when the acts were committed, subject to a retroactive date or to a requirement that the acts occurred while the policy or a continuous predecessor was in force. That structure exists because employee fraud is typically long-running and discovered late.

Two consequences follow. First, continuity of cover matters more than usual: a gap between policies, or a change of insurer without agreed prior-acts cover, can strand a loss that was being committed throughout. Second, discovery is defined, usually as the point at which a responsible officer becomes aware of facts that would cause a reasonable person to suppose that a covered loss has been or may be incurred. Notification clocks run from that moment, not from the completion of the investigation, and the notification condition is often a condition precedent — see claims notification condition.

Proving the loss

Fidelity claims are documentary. The insured has to establish that an identified act of dishonesty occurred, that it caused a quantified direct loss, and that the loss falls within the period and the definitions. In practice that means bank records, ledgers, authorisation trails, system logs and, frequently, a forensic accountant's report. Wordings often require the insured to prove the loss to the insurer's reasonable satisfaction and may specify what evidence is acceptable.

Where accounting records are themselves incomplete — which is common, because concealing the fraud usually involves corrupting the records — the claim becomes much harder. Cover for the cost of the forensic investigation is available as an extension and is worth having, both because the cost is real and because insurers value work done properly.

Where crime cover goes further

Modern commercial crime wordings extend the fidelity idea in several directions: third-party fraud committed by people outside the business; forgery and counterfeiting; computer crime and unauthorised electronic funds transfer; and, importantly, social engineering fraud — the payment-diversion and impersonation frauds where a genuine employee is deceived into making a genuine payment to a criminal.

Social engineering is the exposure most commonly assumed to be covered and most commonly not. Because the employee acted honestly and the transfer was authorised, a classic fidelity clause does not respond and a computer crime clause requiring unauthorised access may not either. Cover exists but is usually a separate insuring agreement with its own sub-limit and its own conditions about callback verification of payment instructions.

There is also an interface with professional indemnity. A PI policy typically excludes the insured's own dishonesty but may extend to the dishonesty of employees causing loss to clients — see dishonesty extension and dishonesty exclusion. Fidelity covers loss to the business itself. Both may be needed, and the two wordings should be read side by side so there is no space between them.

Controls insurers expect

Underwriters price fidelity cover off internal control rather than off claims history, because most businesses have no claims history until they have a large one. The recurring questions are: segregation of duties between the person who authorises a payment and the person who releases it; dual authorisation above a threshold; independent bank reconciliation; controls on changes to supplier bank details, with verification by a call to a previously held number; mandatory holiday for staff in sensitive roles; vetting and reference checking; and access controls over payment systems.

Many wordings make some of these conditions of cover rather than merely underwriting information, so the answers on the proposal form should describe what actually happens, not what the procedure manual says.

Why it matters

Employee fraud is a low-frequency, high-severity exposure that most businesses believe cannot happen to them, and it is one of the few loss types where the person best placed to conceal it is the person you trusted with the controls. The cover is comparatively inexpensive, but it is unusually sensitive to definitions — of employee, of direct loss, of discovery — and to the completeness of your own records. It is worth buying deliberately rather than accepting whatever sub-limit came bundled in a package.

Frequently asked questions

What does fidelity insurance cover?

The insured's own direct financial loss caused by dishonest or fraudulent acts of its employees, typically requiring intent to cause the insured a loss and to obtain an improper financial gain. It is first-party cover, so it pays the business rather than a third party.

Is fidelity insurance written on a claims-made basis?

It is normally written on a discovery basis. The trigger is discovery of the loss during the policy period, whenever the acts were committed, subject to any retroactive date or continuity requirement. That makes unbroken cover and agreed prior-acts wording important when changing insurer.

Does fidelity insurance cover payment diversion fraud?

Usually not on its own. Where a genuine employee is deceived by an outsider into authorising a genuine payment, the employee has not acted dishonestly, so a fidelity clause does not respond. Social engineering fraud cover is a separate insuring agreement, usually with its own sub-limit and verification conditions.

Are contractors and agency staff covered?

Only if the definition of employee says so. Many wordings cover permanent and temporary staff and directors acting in an employed capacity but treat contractors, agency workers, secondees and outsourced service providers differently. If your operation depends on such people, the definition should be extended expressly.

Related entries

• Commercial crime insurance
• Computer crime insurance
• Social engineering fraud cover
• PI dishonesty extension
• Dishonesty exclusion

This entry is part of the Apex Insurance Wiki. It states the position as at August 2026. Last reviewed 2026-08-22. Next review: 2027-02-22. It is general insurance information, not legal advice, and not regulated advice on a specific policy.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.