Sometimes, you may hear a contractor say that they are bonded and insured. Like most of the time when you speak with contractors though, what this means can be a little bit of a mystery.
To put it simply, being bonded means you have purchased a surety bond that offers limited guarantees to clients.
Being insured means that you have an insurance policy that protects against accidents and liabilities, often with greater limits than bonds.
A critical difference that you, as the business owner, must understand is that when a bond pays a client, you must pay the bond company back. With insurance, as long as you pay the premiums, covered claim proceeds are not recoverable by the insurance carrier.
So what is a bond?
A surety bond is an agreement by a company to be liable for the obligations of another company in terms of debt, default, or another type of failure. There are three parties to a bond: a “surety” who guarantees the obligation of another party known as the “principal” on behalf of the customer known as the “obligee.”
There are several types of bonds used by contractors and in construction:
Contract bonds: Guarantee a specific contract and might be called a performance bond, bid bond, supply bond, maintenance bond, or subdivision bond:
Performance bonds: Guarantees project completion as outlined in the contract
Bid bonds: Guarantees subcontractor and supplier payments
Supply bonds: Guarantees that suppliers will provide the required supplies and materials in a contract
Maintenance bonds: Guarantees work on a project for a period of time after the work is completed
Subdivision bonds: Guarantees work required by the government or municipality will be completed properly and in a timely fashion
Commercial bonds: Provides a guarantee per the terms of the bond form as is the case of a notary bond protecting the general public when the business performs notarial acts
Fidelity bonds: Although not a surety bond, this is a popular bond purchased by businesses to protect against theft
What Is Insurance?
Insurance provides protection to policy limits if a covered claim or incident occurs. Policyholders pay an annual premium to get the protection. Unlike a surety bond, a business owner isn’t required to repay the claim proceeds as they would have to during a bond claim.
Insurance protects against risks like general liability, professional liability, personal property, and loss of revenues. Liability insurance protects third parties who allege you are responsible for their loss, whether that is property damage, bodily injury, or personal injury damage.
Why Many Businesses Need Both
There’s good reason to carry both a bond and insurance. It provides a lot of consumer confidence when a company has both insurance and a bond. When businesses do this, they are guaranteeing that jobs will get completed timely and properly and also provide much-needed protection against liabilities arising from an accident on the job.
It’s important to understand that not all bond coverages are the same as insurance coverages—meaning they protect you against different things. Bonds safeguard against a failure to meet contractual obligations while insurance protects against third-party claims.
Most business owners get general liability protection packaged in with a BOP that also additionally protects them from theft or damage to company belongings in the event of a fire, burglary, or other covered loss. Having insurance could prevent having to pay thousands of dollars or more in damages.
It’s also important to note that businesses that have both a bond and insurance are more likely to land bigger contracts. Bonds are required for licensing while government entities and private organizations prefer to work with insured contractors and often require liability insurance when accepting bids.
How do I get my business bonded?
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