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 get bonded defined so that you understand the difference 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.
Surety bonds 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.
Ready to Get Started?
Get a real-time quote today.
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 financial losses. Usually, they are not required, with the exception of ERISA bonds to protect employee benefit plans.
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.
Which Bond Do You Need?
Bonds are required across the country for small businesses and big companies alike. 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 may include bid bonds, performance bonds, and payment bonds.
- Court bonds - certain courts require these bonds for a variety of purposes. These include probate bonds or judicial bonds.
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 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.
How Much Does a Surety Bond Cost? 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.