Bond insurance is a risk mitigation tool commonly used in general contracting and similar fields. Also known as “financial guaranty insurance,” bond insurance guarantees the repayment of the principal and all associated interest payments to bondholders in the event that a payment is defaulted by the issuer.
Clients typically want to see that contractors and other professionals are licensed, bonded, and insured. That triple level of protection ensures that the services they paid for will be completed. This is also why applicants must provide a certificate of insurance in order to get licensed as general contractors in most states.
Bonded vs. Insured
“Bonded” and “insured” are sometimes used interchangeably, but they are not the same term. The main difference lies in who gets financially restored in the case of an accident or payment default. Simply put, bonds protect the consumers and insurance protects the business.
Businesses are expected to have basic protection for employees and clients that can cover accidents, property damage, and other common events that can become expensive to remedy without third-party assistance. Basic business insurance requirements most commonly include liability insurance and workers’ compensation insurance. Other types of insurance include commercial property insurance, errors and omissions insurance, and umbrella insurance, depending on the industry and risks involved. Businesses carry insurance policies to protect themselves and their employees against losses and lawsuits in the case of unforeseen circumstances. If an employee is injured on the job, for instance, workers’ compensation ensures that neither businesses nor their employees will have to pay fully out-of-pocket on medical expenses.
Surety bonds, on the other hand, are different. These involve three parties: the obligee (consumer that has requested the bond), the principal (the business purchasing the bond), and the surety (the company that underwrites the bond). This bond protects the obligee against losses in the event that the principals fail to meet their obligation. Such failure could be the result of unsatisfactory or incomplete work, failure to comply with laws or regulations, or accusations of theft or fraud.
As with liability insurance, the cost of a bond depends on the level of protection required, usually set in increments of hundreds or thousands of dollars.
What Does It Mean To Be Bonded and Insured?
Bonded and insured means your company has the proper insurance and has purchased a surety bond — though consumers also want to see that your employees are licensed contractors. Being licensed, bonded, and insured is a way to make your company more trustworthy and reliable. Requirements to become bonded vary by state and municipality so it’s important to check regulations in your area.
Different Types of Surety Bonds
There are four primary types of surety bonds. Surety bonds are typically provided by a bank or insurance company.
License and Permit Bond
A license and permit bond is a type of surety bond that guarantees businesses will adhere to all laws and regulations enforced by federal, state, local, or other public bodies. These bonds offer protections to the government and to consumers from fraudulent or shoddy practices. Each license bond is unique to a specific industry and are required by several of those industries.
Performance and Bid Bonds
A performance bond (also called a contract bond) is a type of surety bond that guarantees a contract is fulfilled. These bonds are often used in construction fields where contract work is the norm. With a contract bond, consumers can also file a claim against the bond to recoup financial losses, if work is not completed or does not meet specifications. Performance bonds are often used in congress with bid bonds, which guarantee that a project is completed in accordance with the bid issued by the contractor. In these situations, the bid bond guarantees the price, while the performance bond guarantees the specifications that must be met for the project to be held as fully completed.
Court Bonds
A court bond is a general term for any surety bond applied in a court of law. The two primary types of court bonds are judicial bonds and fiduciary (probate) bonds. Judicial bonds guarantee that court costs will be paid. Fiduciary bonds, on the other hand, merely state that there is a faithful performance of a duty.
These bonds are a little more complex. A fiduciary bond guarantees that a fiduciary will execute their court-appointed duties according to the law — a fiduciary being an individual who is granted power over another person’s interests or assets. These bonds protect any party who has an interest in an estate, such as children, incompetents, or heirs, from fraudulent acts or misconduct.
Fidelity Surety Bonds
A fidelity bond is a type of surety bond that provides protections to your business and your clients from dishonest or unethical employees. These cover losses incurred by policyholders in the event of fraudulent acts or misconduct, such as theft, embezzlement, or forgery.
Any business with employees, contractors, or those with a high turnover rate may want to consider getting a fidelity surety bond. Some businesses are required by law to have one.
Does My Business Need To Be Bonded?
If your state or municipality requires it, your business will need to be bonded. Otherwise, the decision is up to you.
Bond insurance is strongly encouraged for businesses that frequently perform work on other people’s properties, whether that be at customer’s homes or other businesses. Home services companies that perform electrical or plumbing work would benefit from getting bonded.
Benefits include:
- Ensuring clients you are a legitimate business: Being bonded shows potential clients that you run a trustworthy and credible company.
- Ensuring clients you will comply with their specifications: Bond insurance further informs clients that you will perform the work they paid for.
- Protecting your business and your clients from financial losses: In the case of a lawsuit, bond insurance protects your company’s finances from going under.
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