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The term “bonded and insured” is used quite often by contractors and other business people. However, what it means exactly is not perfectly clear to the majority of people. As a business owner, you might be wondering what surety bonds and liability insurance are and if you need to get one or both for your company.
It’s important to understand not only what those terms mean, but also the differences between them. Additionally, you need to know what types of businesses require bonds or insurance — or both.
This article talks about bonds and insurance and provides you with a clear definition of those terms. You’ll also learn the types of bonds and insurance available out there and the key differences between them. Finally, you’ll get information on when you need to get bonded and insured — and why you would be wise to do both.
What Is a Surety Bond?
Surety bonds are often mistaken for insurance — even though both terms have a lot in common, they are actually quite different. Surety bonds are three-party contracts that ensure your business will fulfill all requirements and obligations to both regulatory organizations and customers alike. It’s essentially a tool that provides financial protection in case something goes wrong.
As per the agreement, you are the “principal.” The entity requiring the bond is known as the “obligee.” The surety company that acts as a neutral guarantor is usually a subsidiary of an insurance company. If for some reason your business fails to deliver on per-contract obligations or governmental regulations, the obligee (or the customers themselves) can file against your bond. The surety company will then reimburse them, making sure the obligee or customer receives what was contracted.
Types of Surety Bonds
There are many types of surety bonds out there, depending on the specific contracts your business works with. For example, payment bonds ensure subcontractor and supplier payments. Performance bonds guarantee that you will complete the project as outlined in the contract. Bid bonds ensure that you will meet the price you offered for a public tender or bid. You need to do your research and find out what specific surety bonds your type of work needs.
What Businesses Need Surety Bonds?
While acquiring a surety bond is a good idea for any business, there are certain industries that outright require them. For example, construction companies need to obtain a surety bond in order to participate in public tenders. Other industries that require bonds include notary services, tax preparation, auto dealerships, travel agencies, and more.
What Is Liability Insurance?
Insurance provides you with financial protection in case an accident occurs or a claim is covered. Usually, insurance covers things such as general and professional liability, loss of revenue, personal property, etc.
Essentially, it’s designed to help you deal with third parties that claim you’ve caused them damage. This damage can be property loss, personal damages, injury, and more. Also known as liability insurance, it’s an important factor that you need to take into account, no matter the type of business you’re in.
Types of Liability Insurance
While there are many types of liability insurance on the market, business owners generally have to focus on only two. The first one is general liability insurance — it grants protection against claims that you accidentally caused property damage or personal injuries. General liability insurance is often referred to as “slip-and-fall” insurance.
The second type you should know is professional liability insurance. It protects you from claims that you have not delivered as per contract or have underperformed when it comes to industry standards. Professional liability insurance has a wide coverage including everything from failing to finish a project to giving bad professional advice.
What Businesses Need Insurance?
Liability insurance is needed for any business that operates with the public. Nowadays, lawsuits are more frequent than ever. Even small companies can get hit with a lawsuit for tens of thousands of dollars. In fact, the average slip-and-fall case can cost you around $20,000. You should not take chances when it comes to insurance — make sure you’re covered because accidents happen all the time.
The Main Differences Between Bonds and Insurance
As you can see, surety bonds and liability insurance have quite a lot in common. Both provide financial safety nets in case something goes wrong. However, there are some fundamental differences between the two concepts. Let’s explore them one by one.
- Liability insurance is meant to protect your business. Surety bonds are meant to protect your customer.
- With liability insurance, covered claims do not need to be repaid by you. With surety bonds, on the other hand, you have to repay any proceeds.
- Surety bonds are generally not expensive. It all depends on your credit rating and business history. However, liability insurance can be quite expensive, especially if you’re in a high-risk industry.
- Surety bonds are often required for obtaining certain licenses or participation in public bids. Liability insurance is generally not a requirement — however, it might be included as a requirement in contracts.
- Finally, liability insurance is designed to cover third-party claims of damage or injuries. Surety bonds, on the other hand, are meant to cover only contractual obligations.
Most companies in certain industries need to be both insured and bonded. The benefits you get when it comes to brand reputation and credibility alone are worth the investment. A business that is bonded and insured provides a monetary guarantee about the quality of its services. Bonded and insured companies have higher chances of acquiring new business or winning public and government contracts.