Qualified Intermediary Bond

A qualified intermediary bond, more precisely a fidelity bond carried by a 1031 qualified intermediary (QI), is a form of insurance protection meant to safeguard the exchange funds a QI holds on behalf of investors. Because QIs hold substantial client proceeds, often for up to 180 days, and are largely unregulated at the federal level, the financial safeguards a QI carries are among the most important things an investor can evaluate before engaging one. A fidelity bond protects against losses caused by employee fraud, theft, or embezzlement, while errors-and-omissions (E&O) insurance covers losses from negligence or mistakes in administering the exchange. Investors should also ask whether client funds are held in segregated qualified escrow or qualified trust accounts rather than commingled, whether dual authorization is required to move funds, and the firm's overall financial strength. Some states, including California, Nevada, Colorado, and others, have enacted statutes regulating exchange facilitators that mandate minimum bonding or insurance and other consumer protections, but coverage and requirements vary widely. Because the failure or misconduct of a QI can result in the loss of an investor's entire sale proceeds and the collapse of the exchange, bonding and insurance should weigh more heavily than fee in choosing an intermediary.