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Understanding Insurance Terms: Bonded and Insured

min read

As an entrepreneur, you’ve may have run across the term “bonded and insured”. And if you find yourself going wondering what those terms mean, you’re in good company. For starters, you may be wondering what the difference is between the two? We’re here to help. In the past, we’ve covered terms such as “deductible,” “premium,” “additional insured” and more, to explain some terms you may not understand.

The Difference Between Being Bonded and Being Insured

When you say that you are licensed, bonded and insured, that means that you have the required licensing for your business, proper insurance, and have made payments for additional coverage with a bond. You may understand the idea of having the necessary license. You probably know what insurance is. So let’s discuss bonds.

A bond is like an added level of insurance on your current plan. It guarantees a payment amount if certain conditions are (or aren’t) met in a contract you’ve signed. For example, let’s say you’re a contractor with general liability insurance. That’s a great first step. But you may need to have a contractor bond to cover additional types of damage that could occur on the job, or claims against incomplete work or a shoddy job.

Different Types of Bonds

There are a lot of different types of bonds on the market. Some of the more popular ones among small business owners include:

Surety bonds: 

If your first question is, “what’s a surety bond?” you’re not alone. Basically a surety bond is a contract between at least three parties, that protects against losses caused by on party’s not meeting contractual obligations.

So, if you’re a construction business then the surety bond would be between you, your customer, and the surety (aka your guarantor). You pay the guarantor to take out the bond. If you fail to meet your contractual obligations to your customer, then the guarantor pays the fee or the fine to your customer.

In many cases, the Small Business Administration guarantees surety bonds in order to help small businesses compete for jobs. It’s worth checking if they would guarantee your surety bond.

License and permit bond: 

This type of bond falls under the umbrella category of surety bonds, which themselves are sometimes referred to as “license bonds”.

License and permit bonds, specifically, are bonds that are required by government bodies. This can be on the federal, state and municipal level, as part of the licensing process for your business. Each profession has its own license bond. Depending on your business needs, this bond can be valid for one year or even up to five years.

Basically, the bond is a guarantee that your business will act according to all regulations and laws, protecting both the state and customers.

Contract bonds:

Also known as “performance bonds”, a contract bond serves as a guarantee for the fulfillment of your contractual terms. A performance or contract bond is a particular type of surety bond. Its purpose is to assure a standard of performance agreed upon by the contractor and the customer.

As it is based on the performance, the parties in this contract can specify expected time of completion, materials to be used on the project, and a multitude of other factors to meet the customer’s requirements. It is issued either by a bank or an insurance company, and is generally purchased per project, by contractors, as part of the requirements for securing a job. Among other things, it protects the customer from incomplete projects. This can include instances in which the contractor goes bankrupt before the project is complete.

Fidelity bonds:

The word “fidelity” itself refers to loyalty, reliability, and faithfulness. And what a fidelity bond does is protect policyholders from fraudulent acts. As a small business owner, you would take out a fidelity bond to insure your business from fraudulent acts committed by your employees. This can include stealing or damages caused.

Cost to Get Bonded and Insured

The cost for getting bonded and insured varies. It depends on your profession, the type of bond you’re taking out, the level of coverage you want, deductibles, and even the state in which your business is operating.cost of getting bonded and insured

Some types of bonds are paid in premiums. Others, like a fidelity bond, are typically paid as a percentage of the coverage sum you want, usually around 0.5-1% of the amount. Same goes for contract bonds. For example, if you are looking for a $50,000 bond, you can expect to pay around $500 as a starting price to get it.

Surety bonds are generally calculated similarly, as a percentage of your desired coverage, though usually at a higher rate of up to 15%, with this percentage paid as an annual premium.

In some cases, like licensing bonds, your credit score may be taken into account as well (another important reason to keep your credit rating healthy!).

Does My Business Need to be Bonded?

This is an excellent question. And the truth is, for most professions, whether or not to get small business bonds is up to you. While liability insurance is a must for your business, bonding is a bit more flexible.

If you’re doing smaller jobs like mowing lawns or cleaning houses, then you may not need to be bonded. But if you’re a contractor or daycare provider, then yes, business insurance and bonding is a good idea to look into, and in some cases, it’s required by law.

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