The difference between bonded and insured is simple: a bond serves only one party, while insurance can protect both the policyholder and claimants. Saying you are bonded means you purchased a surety bond that offers a limited guarantee to an obligee (customer). Meanwhile, having insurance means you purchased an insurance policy, which usually has a higher limit than a bond and protects against losses and liabilities.
Small businesses in the retail and restaurant industries do not need bonds. However, service technicians and those in construction or professional services should consider getting both.
Surety Bonds | Liability Insurance |
|---|---|
Is inexpensive | Can be expensive |
Protects contractual obligations | Protects businesses from third-party claims of injury or damage |
Is required for licensing or obtaining a job | Is required for licensing or obtaining a job |
Involves three parties | Involves two parties |
Requires that a new bond be purchased once the bond is paid | Can pay multiple claims within a policy period until the limits are exhausted |
Must be repaid by the principal | Does not require the insurer to repay the insurance company for a claim |
What Is a Surety Bond?
A surety bond is an agreement between three parties: the surety, the principal, and the obligee. A company (known as the surety) guarantees the obligations of another company or individual (known as the principal) for work done on behalf of or for a third party (known as the obligee).
In essence, the surety bond is a promise that if the principal fails in whatever is required, the surety will make a payment to indemnify the affected party. In this way, the bond acts as an assurance for the obligee that risk is being addressed by the principal.
The owner of a construction project (the obligee) hires a general contractor (the principal) to build a warehouse. The owner needs the project completed by a specific date and requires the general contractor to purchase a surety bond from a provider (the surety) that stipulates the project will be completed on time.
The surety bond provides multiple positive benefits. The owner is satisfied because the general contractor will be motivated to complete the project on time, and if it runs over, the owner will be indemnified. The general contractor, as the principal, is motivated to ensure the project is completed on time because they do not want to pay the surety back.
Types of Bonds
Just as there are different types of insurance policies, there are different types of bonds. Surety bonds fall into one of two categories: contract bonds and commercial bonds.
These guarantee a specific contract, usually found in the construction industry. There are different types of contract bonds:
- Performance bonds guarantee project completion as outlined in the contract.
- Bid bonds guarantee a job proposal was made in good faith and are often accompanied by an agreement to bond, meaning if you are awarded the job, you will purchase the appropriate bonds (such as a performance bond).
- Supply bonds guarantee suppliers will provide the required supplies and materials listed in a contract.
- Maintenance bonds are similar to a warranty and guarantee faulty work will be addressed for a designated period after the job has been completed.
- Subdivision bonds guarantee work required by government agencies will be completed properly, quickly, and in compliance with local laws.
These guarantee the terms of the bond and are purchased by businesses such as auto dealers, travel agents, and notaries.
Other types of bonds that are not surety bonds include fidelity and bail bonds. Fidelity bonds may also be purchased by a business to protect against theft.
What Is Insurance?
Insurance protects your business from financial loss, whether from first-party incidents, like theft, or from third-party liability claims that are handled within the limits of the policy. Specifically, insurance protects from claims of general liability, professional liability, damage to business property, and loss of revenue.
An insuring agreement sets the terms between the policyholder and the insurer. In exchange for a premium paid by the policyholder, the insurer agrees to provide the protection outlined in the policy.
Types of Liability Insurance
Liability is a third-party coverage, meaning it protects your business from third parties claiming they were harmed as a result of negligence by your business. Two key forms of liability insurance business owners need to consider are general liability and professional liability.
General liability insurance protects your business against claims that you accidentally injured someone or damaged their property. A common claim involves someone slipping and falling in your business and claiming an injury as a result.
Professional liability insurance protects your business from claims alleging you didn’t perform according to a contract, and as a result, the other party suffered some form of financial hardship. For example, if your professional advice led to a loss of money for the customer, a subsequent claim would be covered by professional liability.
Who Needs a Surety Bond?
Certain professionals, such as heating, ventilation, and air conditioning (HVAC) technicians (see our HVAC business insurance guide), require surety bonds for licensing. They are common in the construction industry. Other professional services, such as tax preparers, notaries, mortgage lenders, and auto dealers, are often required to have surety bonds.
While a customer doesn’t need a surety bond, making sure your contractor is bonded can bring great peace of mind. Insurance protects your property if the contractor damages it. But what if the contractor just walks off the job halfway through the work and you have a half-built bathroom addition? The surety bond would pay out at that point since the contractor failed to perform the contractual duties. Since the contractor will have to repay the bond to the surety company, it provides motivation not to walk off the job.
Who Needs Liability Insurance?
All businesses should consider liability coverage. Depending on the industry and state, a general liability policy may be required. Moreover, the cost of not having insurance is too risky to be ignored. According to the National Safety Council, in 2021, over 43,000 people suffered a fatal fall at a job site. In 2020, the average awarded settlement for product liability claims was over $7 million.
Who Needs Both?
If you work in construction, maintenance, or financial services, you may be required to be insured and bonded. Check with the state board governing your industry. Many contracts, especially in construction or with government agencies, will require both a bond and insurance.
While surety bonds and liability insurance each have unique benefits, there are several advantages to having both:
- Expands your coverage because bonds and insurance cover different scenarios
- Gives customers confidence in your company
- Provides multiple guarantees—you will fulfill the contractual obligations of the job, and you will monitor all risks; if something goes wrong, whether it is the project running overtime or property being damaged, there is coverage available.
Frequently Asked Questions (FAQs)
A surety bond is usually 1% to 2% of the total cost of the bond. However, depending on your credit and the risk of the contract, the price can increase by 15% or more. So, for a $10,000 bond, the price would be $100 to $200. Keep in mind that if the surety has to pay the bond, they will collect the full amount from the principal.
A fidelity bond is a bond a business can purchase to protect itself from employee theft or to protect customers from employee theft of their property. This is an option for businesses interested in added protection against employee dishonesty.
The term “bonded” simply means you are the principal and have obtained a bond from a surety. This can be advantageous and, in some states or industries, required to get your license.
A surety bond may be required depending on your industry and state. For example, to get licensed, HVAC technicians in many states are required to have insurance, a surety bond, or both. If you work in construction, some jobs will want you to purchase a bond during the bidding process.
A cash bond involves two parties and is usually part of the judicial system when someone pays money to bail another person (or themselves) out of jail. It involves the court and the individual seeking to be temporarily released. A surety bond involves at least three parties, including the surety company.
Bottom Line
When trying to understand the differences between bonded vs insured, keep in mind that a surety bond is a guarantee with financial implications involving three parties, whereas insurance is a contract between two parties for coverage related to specific losses. Both bonds and insurance protect from losses. It is better to be bonded and insured than to be unprotected from financial loss.
Whether you need insurance, a surety bond, or both, The Hartford is a great place to start. It offers nearly every type of small business insurance you would need and sells a number of different types of surety bonds. You can get a quote online in just minutes or speak with an expert advisor about your business and the type of insurance you may need.
