Fidelity insurance
A policy that reimburses an employer for money or goods lost through an employee's forgery, fraud or dishonesty — taken wherever staff routinely handle significant cash or valuables.
In plain language
Most insurance protects against outside risks — fire, accident, theft by a stranger. Fidelity insurance protects against something closer to home: dishonesty by the employer's own staff.
It covers losses the employer suffers from an employee's forgery, fraud or dishonesty, whether the loss is in money or in goods, for as long as the policy runs.
Businesses take it out specifically where employees are trusted with large sums of cash or valuables as part of their job — a cashier, a stores-in-charge, a person who reconciles daily collections.
How it works
What the policy responds to: a loss of money or goods caused by an employee's forgery, fraud or dishonesty — not ordinary business losses, bad decisions, or losses caused by outsiders.
What determines whether a business needs it: the workbook ties fidelity insurance directly to exposure — organisations where employees routinely handle significant cash or valuable stock are the natural buyers, because that is precisely where a single dishonest employee can cause a large loss.
The cover runs for the duration of the policy, and typically responds to losses discovered (and traceable to a specific employee's dishonest act) while the cover is in force.
A worked example
A jewellery retailer employs a store cashier who is responsible for closing the daily cash counter, typically handling Rs 8,00,000 to Rs 12,00,000 in cash and gold coin sales across a busy month.
Over several months, the cashier quietly under-reports daily collections and pockets the difference, totalling Rs 6,50,000 by the time an internal audit catches the discrepancy.
With a fidelity insurance policy of Rs 10,00,000 in place, the retailer can claim the Rs 6,50,000 loss from the insurer, once the fraud is established (typically through an internal investigation or police complaint), rather than absorbing the loss entirely out of the business's own funds. Without fidelity cover, the entire Rs 6,50,000 would simply be a business loss, recoverable only if the retailer can successfully sue the former employee personally.
Why NISM asks about it
Chapter 3 (Features of non-Life Insurance Products), section 3.1.2(h), lists Fidelity Insurance among the specialised covers — alongside Liability Insurance, Directors and Officers Liability Insurance, and Keyman Insurance — that a business, rather than an individual, typically buys. Expect a short factual question matching "forgery, fraud or dishonesty by an employee" to Fidelity Insurance, against distractor options like Liability Insurance or Keyman Insurance.
Common exam traps
- Fidelity insurance covers the employer's loss from its own employee's dishonesty, not a general business loss and not a loss caused by an outside party.
- Do not confuse it with Keyman Insurance, which pays the company on the death of a key executive — a completely different risk (mortality, not misconduct).
- Do not confuse it with Liability Insurance, which covers the business's legal liability to third parties for negligence — fidelity insurance is about internal dishonesty, not external claims.
- It responds only to forgery, fraud or dishonesty — an employee's honest mistake or poor judgement is not what this cover is for.
Check yourself
1.Which policy covers losses sustained by an employer as a result of forgery, fraud or dishonesty by an employee?
- a)Keyman insurance
- b)Fidelity insurance
- c)Directors and Officers liability insurance
- d)Liability insurance
Show the answer
Answer: (b) Fidelity insurance
A FIDELITY INSURANCE POLICY COVERS LOSSES SUSTAINED BY THE EMPLOYER AS A RESULT OF AN ACT OF FORGERY, FRAUD OR DISHONESTY FROM AN EMPLOYEE. The loss can be of MONEY OR GOODS, and the policy is usually taken where large sums of cash or other valuables are being handled by the employees. Keyman insurance protects the company against the death of a key executive; D&O protects directors and management against personal liability.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Directors and Officers liability insuranceA liability policy covering board members, management and supervisory staff for personal liability and defence costs from claims alleging a wrongful act committed in the course of their duties for the company.
- Family floater policyA single health insurance policy covering several named family members under one shared sum insured, instead of separate policies for each — cheaper, but the pool can run out for later claims.
- Keyman insuranceA life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
- Liability insuranceIndemnity against damages payable under law for personal injury to third parties or damage to their property, whether the liability arises from negligence at common law or on a no-fault basis under statute.