Difference Between Being Bonded & Insured | World Insurance

When starting a business, the surety bond process can be quite confusing and might not even be on some business owners' radars. Business founders are typically quick to purchase business insurance to safeguard their investment, but many aren't immediately aware of the need for a surety bond.

Furthermore, they might not even understand how it differs from insurance. This blog will explain the difference between being bonded and insured as a business, and under which circumstances you need a surety bond.

What Does it Mean to Be Bonded and Insured?

As a business owner, understanding the difference between being insured and being bonded is essential to protecting your company, clients, and employees. While both offer financial protection, they serve different purposes and cover different risks. Being bonded means a third-party surety company provides a financial guarantee that your business will fulfill its obligations. Being insured means an insurance company provides coverage for specific losses or damages that may occur during the course of business operations.

The Importance of Being Bonded

When a business is bonded, it means that it has purchased a surety bond to provide financial assurance to clients and stakeholders. Surety bonds protect against potential losses caused by the business failing to meet its contractual or legal obligations. There are various types of surety bonds, each designed to meet different needs and industries.

Common types of bonds include:

• License and Permit Bonds: Required by local governments to ensure businesses comply with regulations.
• Performance Bonds: Often used in construction to guarantee the completion of a project.
• Fidelity Bonds: Protect against losses due to employee theft or dishonesty.
• >Contract Bonds: Provide financial assurance that a contract will be fulfilled as agreed.

Bonds work by offering financial protection to the obligee (the party requiring the bond) if the principal (the business) fails to meet its obligations. Unlike insurance, bond guarantees require reimbursement if a claim is paid out.

The Importance of Being Insured

Business insurance provides financial coverage for various risks and liabilities that could arise during daily operations. Types of insurance coverages include protection against property damage, liability claims, and employee injuries.

Key types of small business insurance include:

• General Liability Insurance: Covers claims related to bodily injury, property damage, and advertising injury.
• Workers' Compensation Insurance: Provides benefits to employees who sustain work-related injuries or illnesses.
• Professional Liability Insurance: Protects against claims of negligence or mistakes in professional services.

Insurance coverages help protect the financial health of a business by absorbing risks and reducing out-of-pocket expenses when unexpected events occur.

Bonded vs Insured: Key Differences

Although being bonded and insured might seem similar, they serve different purposes. The primary distinction between the two lies in who they protect and how claims are handled.

• Who They Protect: Bonds protect the client or customer, while insurance protects the business itself.
• Claims Handling: In the case of a bond, the business must reimburse the surety company if a claim is paid, whereas insurance does not require repayment by the business.
• Scope of Coverage: Insurance covers unforeseen events like accidents and natural disasters, while bonds guarantee performance and compliance.

Being both bonded and insured is crucial for businesses in industries where client trust and compliance with regulations are paramount. Whether you're applying for a contract, hiring employees, or entering clients' homes, having both in place demonstrates professional and financial responsibility.

If you're unsure about what coverage and bonds your business needs, consulting with an experienced insurance company or surety provider can help tailor the right plan for your unique risks and obligations.

What is a Surety Bond?

Surety bonds are a three-party agreement. The principal, surety company, and obligee enter into a contract that guarantees specific tasks will be completed, or else the obligee can make a claim from the bond. If the specific tasks outlined are not met, the principal is obligated to pay back the claimed funds to the bond. Moreover, surety bonds:

• Require the principal to pay premiums in addition to loss reimbursement
• Have premiums that only cover expenses, not losses
• Often can't be canceled until the project is fulfilled or a release is obtained

In a sense, a surety bond is similar to a credit extension to the principal by the surety.

What is Insurance?

Unlike a surety bond, insurance is a two-party agreement between the insurance carrier and the insured. With insurance, the insured is required to pay the premium, and in exchange, they can claim loss benefits from their policy. No claim reimbursement is requested by the carrier, and the insured is entitled to cancel their policy at any time.

How do I Know if I Need to Get Bonded?

When starting a business, you'll need all the help you can get. Some of the most common situations where a surety bond is needed include:

• Business Services Bond: If your business requires you to enter others' homes or businesses, you may be required to have this form of dishonesty bond.
• Notary Public Bond: If you're applying to become a notary with the privilege of notarizing documents, you might be required to have this bond.
• Probate Bond: If you're appointed as a conservator, administrator, or guardian of a child or incapacitated person, the court may require a probate bond.
• License and Permit Bond: If you're a contractor performing a job in a new city, the city might require license and permit bonds.

There are several other types of surety bonds, such as those needed to provide employees with a pension or 401(k) plan, and it can get confusing. If you have any questions, reach out to your insurance agent, and they can help.

Do I Need Business Insurance if I Have a Surety Bond?

Despite surety bonds protecting business owners from those who fail to fulfill contractual obligations, you still need business insurance to cover potential losses incurred by negligent acts, natural disasters, or other covered events. A surety bond protects the obligee who contracted with the principal, providing reimbursement if the tasks are not performed, but business insurance will cover financial losses from a variety of other entities, making it an essential part of your business plan.

How to Get Bonded and Insured for a Small Business

Getting bonded and insured for your small business involves a few essential steps.

1. First, determine the specific type of bond and types of insurance required for your industry, such as license and permit bonds, fidelity bonds, or general liability insurance.
2. Next, research reputable surety companies and insurance providers to compare coverage options and costs.
3. You'll need to complete an application, provide financial details, and sometimes undergo a credit check. 
4. Once approved, you'll receive documentation proving your business is bonded and insured, giving clients confidence in your services. 

Knowing the difference between being bonded and insured as a business owner will ensure you have the right policies to protect you on all fronts. If you're unsure where your business's vulnerabilities stand before and after being bonded, contact your trusted insurance agent. The client advisors at World Insurance Associates can explain surety bonds and help match you with the most appropriate business insurance policy for your needs. 

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.