The Difference Between Bonded and Insured & Why You Need Both
Kimberlee has over 20 years of experience as a financial consultant and insurance agency owner. Her expertise is featured across Fit Small Business life insurance and business insurance content.
This article is part of a larger series on General Liability Insurance.
Sometimes, you may hear a contractor say that they are bonded and insured, but what this means can be a little bit of a mystery. Being bonded means you have purchased a surety bond that offers limited guarantees to clients. Being insured means that you have an insurance policy that protects against accidents and liabilities, often with greater limits than bonds.
A critical difference that you, as the business owner, must understand is that when a bond pays a client, you must pay the bond company back. With insurance, as long as you pay the premiums, covered claim proceeds are not recoverable by the insurance carrier.
What Is a Bond?
A surety bond is an agreement by a company to be liable for the obligations of another company in terms of debt, default, or another type of failure. There are three parties to a bond: a “surety” who guarantees the obligation of another party known as the “principal” on behalf of the customer known as the “obligee.”
Types of Bonds
There are several types of bonds used by contractors and in construction:
- Contract bonds: Guarantee a specific contract and might be called a performance bond, bid bond, supply bond, maintenance bond, or subdivision bond:
- Performance bonds: Guarantees project completion as outlined in the contract
- Bid bonds: Guarantees subcontractor and supplier payments
- Supply bonds: Guarantees that suppliers will provide the required supplies and materials in a contract
- Maintenance bonds: Guarantees work on a project for a period of time after the work is completed
- Subdivision bonds: Guarantees work required by the government or municipality will be completed properly and in a timely fashion
- Commercial bonds: Provides a guarantee per the terms of the bond form as is the case of a notary bond protecting the general public when the business performs notarial acts
- Fidelity bonds: Although not a surety bond, this is a popular bond purchased by businesses to protect against theft
What Is Insurance?
Insurance provides protection to policy limits if a covered claim or incident occurs. Policyholders pay an annual premium to get the protection. Unlike a surety bond, a business owner isn’t required to repay the claim proceeds as they would have to during a bond claim.
Insurance protects against risks like general liability, professional liability, personal property, and loss of revenues. Liability insurance protects third parties who allege you are responsible for their loss, whether that is property damage, bodily injury, or personal injury damage.
Types of Liability Insurance
Business owners often focus on two types of liability insurance:
- General liability: Protects your business against third-party claims that you accidentally injured someone or damaged their property. This often is referred to as “slip-and-fall” coverage.
- Professional liability: Protects you from claims that allege you didn’t perform according to a contract or abide by professional standards in your conduct. This could be failing to complete a contract or giving someone the wrong professional advice.
Bonded vs Insured: 4 Key Differences
When comparing bonds and insurance, there are some key differences to consider.
Surety Bonds | Liability Insurance | |
|---|---|---|
Cost | Inexpensive | Can be expensive |
Repayment Terms | Proceeds must be repaid | Covered claims do not need to be repaid |
Protection | Covers contractual obligations | Covers third-party claims of injury or damage |
Required for Licensing | Required for licensing | Not required unless under specific contract conditions |
Who Needs a Surety Bond?
Certain professions require surety bonds to get licensing. Yet, it is just a good idea for others to provide the general public with some assurance that you are a professional. Surety bonds are common in the construction industry as clients have a lot of money riding on the performance and professionalism of a contractor. Other industries, such as tax preparation or notary services, require a bond as part of the licensing process.
If you are looking for a bond to protect your business, CoverWallet can help. Its online system requires just a little bit of information about you and your company to get a quote done quickly. You can be covered within a few minutes.
Who Needs Liability Insurance?
Liability insurance is necessary for businesses that work with the public. Even though it might not be required, small business owners can be sued for damages that can be tens of thousands of dollars. The average slip-and-fall case could cost a small business owner $20,000 or more. The cost of a policy, often around $300 to $500 per year for small businesses, is well worth the money.
If you want to shop around for a general liability insurance policy, consider The Hartford. It is a small business insurance expert with policies that are tailored to your industry and specific business needs, offering a business owner’s policy (BOP) that starts at $300 per year.
Why Many Businesses Need Both
There’s good reason to carry both a bond and insurance. It provides a lot of consumer confidence when a company has both insurance and a bond. When businesses do this, they are guaranteeing that jobs will get completed timely and properly and also provide much-needed protection against liabilities arising from an accident on the job.
It’s important to understand that not all bond coverages are the same as insurance coverages—meaning they protect you against different things. Bonds safeguard against a failure to meet contractual obligations while insurance protects against third-party claims.
Most business owners get general liability protection packaged in with a BOP that also additionally protects them from theft or damage to company belongings in the event of a fire, burglary, or other covered loss. Having insurance could prevent having to pay thousands of dollars or more in damages.
It’s also important to note that businesses that have both a bond and insurance are more likely to land bigger contracts. Bonds are required for licensing while government entities and private organizations prefer to work with insured contractors and often require liability insurance when accepting bids.
Bottom Line
Don’t be caught unprepared. Both surety bonds and general liability insurance are affordable for most small businesses in most industries. You can get a bond for around 2% of the bond value, and you can get business insurance for as little as $300 per year. Remember that by protecting the public from losses, you protect yourself from expensive claims.
