Blog Topic: Bonded vs. Insured: Who Needs Both?

Bonded vs. Insured

Businesses often use their bonded or insured status to advertise their responsibility to prospective customers, but what exactly does it mean for a company to be bonded vs. insured?

Simply put, bonding protects your clients from financial loss when doing business with you, while insurance protects you from unanticipated events that could result in financial damages. 

In the case of a surety bond claim, the surety company pays the client, then your business is responsible for reimbursing the surety company the amount of the claim. With insurance, your insurance provider pays claims directly to your business, but you do not have to pay the insurance company back. 

Insurance and bonds are both valuable for business owners, as insurance protects you from paying the full expenses associated with accidents or lawsuits, while bonds show customers that you are a reliable company they can trust to fulfill contractual obligations.

The primary difference between insurance and bonds is that insurance protects your business and assets, while bonds protect your clients by guaranteeing your company will satisfy their expectations.

Insurance vs. Bond Key Differences

Bonds	Insurance
You have to reimburse the surety company when it pays for a claim.	The insurance company pays for covered claims.
Bonds are typically priced based on the specific risk they cover and your credit history.	Insurance can be priced based on many factors, including location, business type, number of employees, and insurance claim history.
Bonds protect clients’ interests.	Insurance protects your business and assets.

What Does It Mean to Be Insured?

Purchasing the right insurance is critical in protecting your business from financial damages due to an unforeseen event. Business insurance can help shield your company from financial losses due to accidents or lawsuits. 

Insurance protects your business by keeping you from having to pay the complete cost of expenses associated with accidents or defending lawsuits out-of-pocket. Without insurance, these expenses can quickly add up and might even force your business to close due to bankruptcy. 

Many businesses are legally required to have insurance, but even if you aren’t, you should still consider getting a policy that protects you from financial losses. 

Any company that does business in a physical location, has employees, or handles customers’ personal data should strongly consider purchasing insurance coverage. Insurance protects you and your customers and shows clients that you have a risk-management plan. 

Types of Insurance

Different kinds of insurance provide specific types of protection for your business. Some common types of small business insurance include:

• General Liability: Can provide financial protection if a customer gets injured on your business property or if the building your company operates from is damaged. 
• Professional Liability: This type of insurance can help pay legal expenses if you are accused of negligence or providing inaccurate information that causes harm to a customer. 
• Business Income Coverage: Helps cover loss of business income due to fires, storms, or theft. 
• Commercial Property Insurance: Covers the costs of repairing property damage or replacing stolen items. 
• Workers’ Compensation: Helps pay for expenses arising from employees’ workplace injuries. 
• Data Breach: Covers costs associated with a data breach, including paying for notifying affected customers or paying for credit monitoring services.
• Business Owner’s Policy (BOP): A BOP combines property and liability insurance policies to provide your business with customized and affordable coverage.
• Commercial Umbrella Insurance: Additional coverage in case of an expensive accident or lawsuit that exceeds your policy limits.

What Does It Mean to Be Bonded?

Now that you understand what it means to be insured, what is the difference between a bond and insurance? Many state laws, government agencies, and larger organizations require certain businesses to be bonded. Being bonded means that your business has purchased a surety bond.

A surety bond is a type of contract that guarantees that your client will not lose any money if something happens that keeps you from delivering promised results. 

A surety bond involves:

• The principal: the business purchasing the bond
• The obligee: the client asking for the bond
• The surety: the bond underwriter

For instance, let’s say you own a digital marketing agency that designs websites and provides marketing services for large organizations. The employee responsible for building the backend of a client’s website quits in the middle of the project. A surety bond would pay the obligee if you could not provide the website by its due date. You would then have to pay the surety back for the claim. 

Any small businesses committing to big projects should be ready to purchase a surety bond to help manage unforeseen risks. Although not always required, being bonded shows your clients that you are dedicated to providing quality service and protecting their investments no matter what happens. 

Let’s look at some common types of surety bonds.

Construction/Contract Bonds

Construction bonds ensure that a construction company or a contractor complies with government-issued building permit rules and fulfills contractual obligations. They include performance, payment, bid, maintenance, and license and permit bonds. 

• Performance: Compensates the client if a contractor fails to finish a job. 
• Payment: These bonds ensure that laborers and suppliers get paid.
• Bid: Bid bonds assure the client that they won’t lose money if a contractor wins a bid and then doesn’t take the job or the job ends up costing more money than the bid. 
• Maintenance: If a project is found to have defective materials, a maintenance bond can help protect the client.

For instance, let’s say a roofing company doesn’t properly install a drip edge, which leads to water getting under the client’s roof. The client could file a claim to pay for the water damage, and the roofing company would have to pay the surety company back. 

Commercial Bonds

Commercial bonds include judicial, fiduciary, public official, and license and permit bonds. Judicial bonds and fiduciary bonds are used in court proceedings. Public officials (including tax collectors, postal workers, and sheriffs) are often required to hold public official bonds. The most common type of commercial bond for small businesses is a license and permit bond. 

License and permit bonds guarantee that a contractor will comply with licensing and legal requirements. Businesses that may be required to get license and permit bonds include:

• Construction companies
• Plumbers
• Liquor stores
• Insurance adjusters
• Retailers
• Tech companies
• Pawn brokers
• Notaries
• Banks
• Private investigators
• Credit repair services
• Auto dealers
• Mortgage brokers

Fidelity Bonds

Fidelity bonds are different from surety bonds, as they can protect both the client and your business.

A first-party fidelity bond pays you back if your employee steals something from your company. A third-party fidelity bond will reimburse your clients if an employee rips them off. Clients will generally ask for third-party fidelity bonds, but it is still a good idea to have a first-party fidelity bond to protect your business.

For example, tech companies often have fidelity bonds to protect against fraud, data breaches, and employee theft, and cleaning companies use janitorial fidelity bonds in case an employee steals something or a cleaning job doesn’t meet the client’s standards.

ERISA Fidelity Bonds

ERISA is the Employee Retirement Income Security Act, a law that requires businesses that provide employee benefit plans to carry a fidelity bond in case fraud jeopardizes an employee’s retirement plan.

Why Some Businesses Need Both

Some businesses may need to be both insured and bonded. Common reasons to have both types of protection include when you are legally required to do so, have a client or contract that requests that you are insured and bonded, or want additional protection due to the nature of your business. 

Legal Requirements

Some state and federal laws require businesses in certain industries to be both insured and bonded.

For example, let’s say you own a construction company and want to bid on a public works job in California.

The Miller Act requires federally-owned public work contracts of over $100,000 to have payment and performance bonds, and the California Contractors State License Board (CSLB) requires contractors to have liability insurance before it will issue a license.

Client or Contractual Obligations

Some clients–particularly larger organizations or government agencies–may require you to have insurance and surety bonds before they will sign a contract with you.

Additional Protection

If you are in a higher-risk industry (such as construction) it’s a good idea to be bonded and insured. Having both types of protection shows potential customers that you run a legitimate company and that they won’t lose money if they do business with you. 

Conclusion

When it comes to insurance vs. bonding, insurance protects your assets and involves you and your insurance company. Your insurance provider will pay you for any claims. Getting a surety bond involves three parties: you, your client, and the surety bond company. If a claim is filed against the bond, the surety company will pay for it, but then you will be responsible for reimbursing the company.

Most small businesses need general liability insurance at a minimum. However, depending on your industry and business type, other types of insurance–such as professional liability, data breach, or workers’ compensation coverage–may be appropriate. 

Businesses that may need surety bonds include :

• Construction companies
• Contractors
• Tech companies
• Companies that deal with customers’ personal financial information
• Auto dealers
• Liquor stores

Depending on their industry, location, clients’ requirements, and desire for additional protection, some companies might need both insurance and bonding.

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