What Does It Mean to Be Bonded and Insured?
Many mistakenly lump insurance and bonds together into the same category seeking out “bonded insurance”.
While insurance and bonds have commonalities, they are different products. So, what does it mean to be bonded and insured?
In this article, we’ll get bonded defined so that you understand the difference for your newly bonded business and your clients.
What is “Bonded”?
The confusion stems from there being two different bond products that most licensed insurance agents don’t understand.
Both allow you to market as a bonded company, but they have different purposes.
Surety bonds create a potential liability for your company, but are required of you by a third party (typically the government) to do business. There are thousands of surety bond requirements throughout the U.S. You can search for your surety bond requirements by state in our database.
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Fidelity bonds provide insurance for your company against employee dishonesty and theft. Should a bonded employee embezzle funds, the fidelity bond will reimburse your company for losses. Usually, they are not required, with the exception of ERISA bonds to protect employee benefit plans.
Which Bond Do You Need?
Bonded vs. Insured
When businesses advertise that they are “bonded”, they could be referring to their surety or fidelity bonding. Fidelity bonds are an insurance product for your company, while surety bonds are insurance for the obligee (party requiring you to post the bond). Fidelity bonds work in the same way as property and casualty insurance that most are familiar with. However, surety bonding is quite different, as you are expected to reimburse the surety for claims.
This makes surety bonds a form of credit to you. The alternative is usually to post cash in the form of a letter of credit. A letter of credit will require you to 100% collateralize the funds with the bank. When it comes to surety bonds, collateral is almost never required, meaning they are guaranteeing “you are good for it” when it comes to paying claims. You can also take a look at our most frequently asked surety bond questions.
What Does Licensed & Bonded Mean?
Many occupations require you to obtain a license to operate your business. At times, a surety bond is required to guarantee that you follow the rules of the license, e.g. a contractor license bond or auto dealer bond. Should you break them, a claim could be filed on your bond.
Not all business licenses require a surety bond to be posted. To see if yours does, you can search the surety bond requirements by state. If your industry does not require a license bond, you can always obtain fidelity bond coverage to protect your clients from your employees stealing from them. This will still allow you to provide the peace of mind your clients are looking for when you tell them you are licensed and bonded.
How Much Does it Cost to Be Bonded?
Fidelity bonds are relatively cheap and the rates don’t vary much. However, they vary based on the type of fidelity coverage, the amount of coverage, number of employees bonded, and the controls in place for your business. With all of those variables, you must complete an application to determine your fidelity bond costs.
Surety bond costs are based on numerous factors as well. The type of bond and your ability to pay the surety back for claims determine your surety bond rate. The bond amount (or contract amount for construction bonds such as a performance bond) along with the rate determines your final costs. If you are just in the initial stages of research, you can learn more by reading our article “How Much Does A Surety Bond Cost?”. You can also use our surety bond premium calculator to get a ballpark estimate of costs. If you are ready to purchase, you can get a firm surety bond quote online. Keep in mind, it's crucial that you work with an expert in the industry. Learn more about how to ensure you choose the proper bond company.
The Consumer’s Guide to Surety Bonds E-Book
If you want the most thorough answers available to all of the fundamental questions related to getting a surety bond (such as "what does it mean to be bonded?"), you can download our free "Consumer's Guide to Surety Bonds" e-book. The topics covered in the e-book include:
- How surety bonds work
- How indemnity agreements affect you
- The various surety bond types required
- Surety bond pricing
- How to get bonded
- How claims affect you
This e-book was created with first time applicants in mind, and is an excellent resource if you're unfamiliar with how surety bonds work, pricing and how they can greatly affect you or your business.