What Does It Mean to Be Bonded and Insured?
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Many mistakenly lump insurance and bonds into the same category seeking out "bonded insurance".
However, 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 define “bonded” so that you understand the main differences for your newly bonded business and your clients.
What is "Bonded"?
The confusion between bonded and insured stems from there being two different bond products that most licensed insurance agents don't understand—surety bonds and fidelity bonds. While both allow you to market as a bonded company, they have different purposes.
The definition of surety bonds means they are a potential professional liability for your company but are required of you by a third party (typically the government) to do business. They are a financial guarantee for your clients, suppliers, and/or subcontractors if you breach the contractual obligation laid out in your bond terms.
There are thousands of surety bond requirements throughout the US. For example, you may need a bid bond to bid on construction projects over a certain contract price or an auto dealer bond to run a car dealership.
You can search for your surety bond requirements by state in our database. Or if you already know what you need, get a free bond quote below.
What is the Difference Between Being Bonded and 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. Just like when a claim is filed on an insurance policy, the insurance company pays out to the policy holder with no expected reimbursement. However, surety bonding is quite different, as you are expected to reimburse the surety for claims.
A surety bond works as a form of credit to you. The alternative is usually to post cash in the form of a letter of credit, which will require you to 100% collateralize the funds with the bank. When it comes to surety bonds, collateral is rarely needed, 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 is the Difference Between a Surety and a Guarantor?
These terms are often used interchangeably in bonding to refer to the issuer of the bond. However, legally speaking, they are not the same in most states—they are separate third-party assurances.
A surety is someone who signs the contract at the same time you do. They agree to take on your debt and acknowledge that it is their responsibility. Like a surety company does with a bond.
A guarantor agrees to take on the debt only if you (the principal) fail to pay. A guarantor has no responsibility to pay until the principal defaults.
Should I Get Bonded or Insured?
While it is recommended that all professionals carry some form of insurance, whether you need to be bonded will depend on your type of business.
Many types of bonds are required across the country for small businesses and big companies alike. But in general, three categories of surety bonds exist that may be required as part of doing business. These broad surety bond types include:
- License and permit bonds - these types of commercial bonds are required for various professionals to operate legally. Auto dealer bonds, freight broker bonds, and notary bonds are some examples.
- Contractor bonds - businesses and individuals working on public construction projects are likely required to obtain a contractor bond. These contract bonds (bid bonds, performance bonds, and payment bonds) are common in the construction industry to deter incomplete work, missed payments, and poor craftsmanship.
- Court bonds - certain courts require these bonds for a variety of purposes. These include probate bonds or judicial bonds.
What about fidelity bonds? Unlike the other three bonds mentioned above, a fidelity bond is an elective bond (meaning there is no obligee requiring it). However, many businesses choose to get this bond insurance as it protects their company from financial losses due to employee dishonesty or fraud. Additionally, there are also fidelity bonds available to protect your customers from losses caused by dishonest employees.
Which Insurance Do You Need?
There are various types of business insurance, and depending on your business needs, you may need one (or multiple) policies. The most common types of insurance include:
- General Liability Insurance - Reimburses a business in the event of property damage, bodily injury, or theft. It is one of the most popular small business insurances and is recommended for all small business owners. In some cases, a general liability insurance policy may also be a requirement to obtain certain licensing.
- Workers Compensation Insurance - Covers medical care, medical bills, lost wages, and disability for employees injured on the job. In most states, this insurance policy is required for any business with employees.
- Business Interruption Insurance - This insurance coverage reimburses losses in the event of business closure due to theft, fire, or acts of nature (wind, hail, lightning). It is also commonly referred to as business income insurance.
- Commercial Property Insurance - Covers your business property and its contents (equipment, inventory, furniture) in the event of theft, vandalism, fire, or weather-related damage. If you operate your business out of your home, you may be able to add-on to your homeowners policy.
- Business Owners Policy (BOP) - If you need general liability insurance and commercial property insurance, inquire about a Business Owners Policy (BOP) when getting insurance quotes. Many small business administrations use a BOP as it is more affordable than two separate policies.
The Importance of Being Bonded and Insured
Instills Trust - Being bonded and insured signals to potential customers that you are a legitimate business that they can trust. For example, many people will not hire a cleaning company unless they hold a janitorial bond.
Provides Financial Protection - Being insured means you are protected from financial losses due to unforeseen circumstances. You won’t be left paying out of your own pocket if things go awry.
Sets the Foundation for Large Contracts - Many large businesses and clients require any company they partner with to be licensed and insured.
Read “How to Get Bonded and Insured” to learn more.
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.
Who Decides Who is Bonded and Insured?
Government agencies and other regulatory bodies dictate bonding and insurance requirements. It isn’t uncommon for requirements to vary with each state and municipality, so checking the laws where your business operates is essential.
How Much Does It Cost to Be Bonded?
Fidelity bonds are relatively cheap, and the rates don't vary much. However, they will differ based on the type of fidelity coverage, the amount of coverage, the 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. Note that for larger bonds, a credit check is often required.
The cost of a surety bond is generally anywhere from 1% to 15% of the total bond amount. To determine your surety bond rate, a surety company will use an underwriting process.
This assessment is based on any combination of financial statements, previous bond history, experience in your industry, and moral character. A credit report that shows your credit history and personal credit score may also be required. They are looking for how high a risk you are to trigger a bond claim and your ability to pay them back in that event.
Once assessed, the surety bond amount (or contract amount for construction bonds such as a performance bond) along with the rate determines your final bond price. For example, if you need a $30,000 mortgage broker's license bond and your rate is 5%, you owe a flat fee of $1,500.
Note that while an applicant's credit is often assessed, those with poor credit or those determined to be a higher risk are still eligible for many types of surety bonds. See Getting a Surety Bond with Bad Credit for more information.
How Long Does Bonding Last?
When it comes to surety bonds there are renewable bonds and continuous bonds. Renewable bonds are valid anywhere from 1-4 years before they need to get manually renewed.
Continuous bonds are automatically renewed every year until canceled. Any expiry dates will be laid out in your bond's paperwork.
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.
All You Need To Know About Surety Bonds!