Bonded vs Insured: Who Needs Both?
Nathan Weller is an Insurance Expert focusing on insurance for small business. He has 15 years experience in insurance operations, FNOL, and claims handling.
This article is part of a larger series on General Liability Insurance.
The difference between bonded and insured is that a bond serves the third party, whereas insurance can protect both the policyholder and claimants. Saying you’re 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 will have a higher limit than a bond, protects against losses and liabilities.
Small businesses in the retail and restaurant industry don’t need bonds. However, those in construction, service technicians, and professional services should consider both.
Surety Bonds | Liability Insurance | |
|---|---|---|
Cost | Inexpensive | Can be expensive |
Repayment Terms | Proceeds must be repaid | Policyholder does not need to repay insurance company |
Protection | Contractual obligations | Third-party claims of injury or damage |
Required for | Licensing or obtaining a job | Licensing or obtaining a job |
Number of Involved Parties | Three: obligee, principal, and surety | Two: policyholder and insurance company |
Life Cycle | Once the bond is paid, a new bond needs to be purchased | Can pay multiple claims within a policy period provided limits are not exhausted |
What Is a Surety Bond?
A surety bond is an agreement between a company (known as the surety) to guarantee 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.
For example, the owner of a construction project hires a general contractor to build a warehouse. The owner needs the project completed by a specific date and requires the general contractor to purchase a surety bond 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, will be indemnified. The general contractor is motivated to ensure the project is completed on time because they don’t want to pay the surety back.
Types of Bonds
Just as there are different types of insurance policies, there are different types of bonds. There are two main categories for surety bonds: contract bonds and commercial bonds:
1. Contract bonds 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 is 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 in a contract
- Maintenance bonds are similar to a warranty and guarantee faulty work will be addressed for a while after the job has been completed
- Subdivision bonds guarantee work required by government agencies will be completed properly, timely, and in compliance with local laws
2. Commercial bonds guarantee the terms of the bond and are purchased by businesses such as auto dealers, travel agents, and notaries.
There are other types of bonds that are not surety bonds, such as fidelity and bail bonds. Fidelity bonds may also be purchased by a business to protect against theft.
What Is Insurance?
A difference between bonded vs insured is you purchase a bond for the benefit of another, while insurance is bought to protect yourself. Insurance is a way of protecting your business from financial loss. The loss can be from first-party incidents, like theft, or third-party liability claims and 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 because of negligence by your business. Two key forms of liability insurance business owners need to consider are:
- General liability protects your business against claims that you accidentally injured someone or damaged their property. A common claim is someone slips and falls in your business and claims an injury as a result.
- Professional liability protects your business from claims alleging you didn’t perform according to a contract and, as a result, the other party suffered a financial hardship. An example is your professional advice led to a loss of money for the customer.
Who Needs a Surety Bond?
Certain professions, like HVAC technicians, require surety bonds for licensing. They’re 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.
To get a bond, a broker like CoverWallet is a good place to start. It’s an online broker where, after answering a few questions, you can get an online quote and be covered in minutes.
Who Needs Liability Insurance?
All businesses should consider liability. Depending on the industry and state, a general liability policy may be required. The cost of not having insurance is too risky to be ignored. The average cost of a slip-and-fall claim runs from $10,000 to $50,000. In 2020, the average awarded settlement for product liability claims was over $7 million.
The Hartford, our best small business insurance provider, offers general liability insurance for an average of $88 a month. It can provide an online quote with coverage tailored for your industry in just minutes.
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 being bonded and insured have their own 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’ll fulfill the contractual obligations of the job and you’ll monitor all risks. If something goes wrong, whether it’s the project running overtime or property being damaged, there’s coverage available.
Frequently Asked Questions (FAQs)
How much does a surety bond cost?
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 to 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’ll collect the full amount from the principal.
What is a Fidelity Bond?
A fidelity bond is a bond businesses can purchase to protect themselves from employee theft or to protect customers from employee theft of their property. This is an option for businesses interested in added protection from employee dishonesty.
What does it mean to be bonded?
The term “bonded” simply means you’re 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.
Are surety bonds required?
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.
How is a cash bond different from a surety bond?
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
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’s better to be bonded and insured than to be unprotected from financial loss.
