Being bonded means that a bonding company has reserved funds that a client can claim if the business doesn't fulfill its obligations. This gives clients some security, knowing they can recover losses if the business doesn't fulfill its obligations. For contractors and business owners, it's important to understand what it means to be surety bonded and how it affects both their business and their clients.

While bonding protects the client, insurance provides coverage for the business itself against unexpected events. It provides protection against unexpected losses, such as property damage or liability claims. Simply put, being bonded protects the client, while being insured protects the business.

Key Differences Between Being Bonded and Insured

The biggest differences between being bonded vs. insured lie in the following:

Purpose and protection

If the business fails to fulfill its obligations, the bond acts as a financial guarantee that the client will be compensated for any losses incurred. This type of protection is common in industries like construction, where clients need assurance that projects will be completed as agreed.

However, insurance protects the business itself from various risks. For example, if a business faces a lawsuit, property damage or employee injury, its insurance policy covers the resulting costs, helping the business avoid significant financial loss.

Claim process

When a business is bonded, the client typically initiates a claim if the business fails to meet its contractual obligations. For instance, if a contractor doesn’t complete a project on time or delivers substandard work, the client can file a claim against the bond. The insurance bonding company will then investigate the claim, and if it’s valid, the client will be compensated up to the bond amount. The business must then repay the bonding company for the claim.

In contrast, insurance claims are filed by the business itself. If a business experiences an event covered by its insurance policy, such as property damage or a lawsuit, it can file a claim with its insurance provider. The insurance company will assess the claim and, if approved, will cover the costs up to the policy limits.

Costs

The cost of bonding and insurance varies due to their different purposes. Bonding costs are generally lower because bonds are typically required for specific projects or contracts and only cover a limited scope. Factors such as the business’s credit history and the type of bond needed can affect the cost.

Meanwhile, insurance premiums tend to be higher because they provide broader, ongoing coverage for various risks. The cost of insurance depends on the type of coverage, the size of the business and the industry it operates in. Despite the higher costs, insurance is essential for protecting a business from a wide range of potential financial losses.

Types of Bonds

Businesses may require different types of business bonds depending on their industry and operations:

  • Contract bonds: These bonds ensure that a contractor completes a project according to the contract's terms. They are common in construction and other industries requiring large-scale projects.
  • License and permit bonds: These are required by local or state governments to ensure that businesses comply with laws and regulations. They are often necessary for obtaining a business license.
  • Payment bonds: These guarantee that a business will pay subcontractors and suppliers as agreed. This type of bond is critical in construction and service-based industries.
  • Performance bonds: Similar to contract bonds, performance bonds ensure that the work is completed to the specified standards and within the agreed timeframe.

Deciding if Your Business Need to Be Bonded

Whether your business needs to be bonded depends on the industry, the nature of the work and client expectations. Some situations where bonding may be necessary include:

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    Contract requirements

    Many government contracts and large private projects require contractors to be bonded as a condition of the agreement.

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    Industry standards

    Certain industries, such as construction and janitorial services, often require businesses to be bonded to gain trust and comply with regulations.

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    Client expectations

    Although not legally required, clients may prefer to hire bonded businesses to ensure their protection against financial loss.

Types of Insurance

There are several types of business insurance, but the most common are:

  • General liability insurance: It covers claims related to bodily injury, property damage and advertising injury caused by the business's operations.
  • Professional liability insurance: It protects against claims of negligence or errors in professional services provided by the business.
  • Workers' compensation insurance: This provides coverage for medical expenses and lost wages for employees injured on the job.
  • Commercial property insurance: This covers damage to a business's physical assets, such as buildings, equipment and inventory, from events like fire, theft or natural disasters.
  • Business interruption insurance: It compensates for lost income and operational expenses if the business is forced to close temporarily due to a covered event.
  • Commercial auto insurance: This type of insurance covers vehicles owned or used by the business for work-related purposes, including accidents and damage.
  • Cyber liability insurance: It protects against losses related to data breaches, cyberattacks and other cybersecurity incidents.
  • Product liability insurance: This covers claims related to injuries or damages caused by products sold or manufactured by the business.

When a Business Should Be Bonded and Insured

Being both bonded and insured is often necessary for businesses to adequately protect themselves and their clients. The combination of business bonding and insurance ensures that contractual obligations and unforeseen risks are covered.

In industries like construction, it’s common for businesses to be licensed, bonded and insured to meet legal and contractual requirements. Clients often prefer working with companies that offer the security of bonded insurance and the protection of a comprehensive insurance policy. Additionally, being bonded and insured can enhance a business's reputation and credibility, attracting more clients and larger contracts.

When to Get Bonded and Insured

Determining the right time to get bonded and insured depends on the specific needs of the business and its industry. However, there are key situations when obtaining both becomes crucial:

  • Before starting a new business: If you are starting a business that operates in an industry where bonding and insurance are commonly required (such as construction or cleaning services), it’s essential to secure both before taking on any clients or contracts.
  • When bidding on contracts: If you’re bidding on contracts, especially government or large private contracts, it’s important to check if bonding and insurance are required.
  • After expanding services: If your business is expanding its services or entering new markets, it’s a good idea to reassess your bonding and insurance needs. Different services or industries may have different requirements, and adjusting your coverage accordingly can help you manage new risks effectively.
  • In response to client requests: If clients begin requesting proof of bonding and insurance, it’s a clear sign that you should consider obtaining both.

Costs to Get Bonded and Insured

The cost of getting both bonded and insured varies based on factors like industry, location and the amount of coverage needed. Bonding a business is generally more affordable than insurance, as bonds are often required for specific projects rather than ongoing coverage.

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    Bond Costs

    The cost of business bonds ranges from 1% to 15% of the bond amount. Factors such as the type of bond, the business's credit history and the bond amount influence the cost.

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    Insurance premiums

    Insurance premiums depend on the level of coverage, the type of insurance, and the business's risk factors. Liability insurance, for example, may cost a small business a few hundred to several thousand dollars annually, depending on the industry.

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    Combined Costs

    When combining both bond and insurance, businesses should budget for both the initial bond cost and ongoing insurance premiums. Working with an insurance and bonding provider can help businesses find the best rates.

How to Get Bonded and Insured

1
Know your business needs

Start by determining the types of bonds and insurance your business requires. For example, if you're a contractor, you might need a performance bond, while a retail business may need general liability insurance and property insurance.

2
Research bonding and insurance providers

Look for reputable bonding and insurance providers that specialize in your industry. Compare their offerings, customer reviews and pricing to find a company that aligns with your needs. Some providers offer both bonding and insurance services, which can simplify the process.

3
Apply for a bond and insurance

Once you've chosen your providers, you'll need to submit applications for the necessary business bonds and insurance policies. For bonding, you'll typically need to provide financial information, business details and a credit check. Insurance applications may require details about your business operations, assets and employees.

4
Review and finalize coverage

After receiving quotes and terms from providers, carefully review the coverage details to ensure they meet your needs. Make sure you understand the limits, exclusions and premiums involved. Once satisfied, finalize your bond and insurance policies by signing the agreements and paying the required premiums.

5
Maintain compliance

Comply with any ongoing requirements, such as renewing your bond or insurance policies annually or providing updates to your provider about changes in your business.

FAQ About Getting Insured and Bonded

Below are answers to some questions you may have about getting insured and bonded.

What does it mean to be bonded?
What does it mean to be bonded and insured?
How to get bonded and insured?
What is a bonding company?
What does it mean to be bonded as a contractor?
What does bonded mean in construction?
What is a bond application?

About Mark Fitzpatrick


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Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.


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