What Does it Mean to be Bonded and Insured
When a business or independent professional is bonded and insured, this means that customers, employees, and sub-contractors engaging in business with that company have legal recourse should the business fail to meet the legal obligations of a work agreement or if that company is found at-fault in work-related property damage, personal injury, or other legal matters.
If a client asks you, “What does bonded and insured mean?”, a simple answer would be to tell them that it means they are incurring no risk in hiring your business and that the quality and completion of your work is guaranteed. According to carriers such as Chubb Surety, being bonded gives customers, suppliers, and subcontractors greater comfort in working with you, and being insured offers as much protection for your personal and business assets as it does to your clients. The Hartford does a fine job of discussing what bonds mean.
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The Difference Between The Two:
Certain types of bonds guarantee that the surety company that bonded your business will pay a client the costs incurred or find another contractor to complete the project if you default. For instance, the bond company will pay to repair damages due to poor workmanship or faulty products when you cannot resolve the issue yourself, and bonding assures employees, suppliers, and sub-contractors that they will be paid. A surety bond such as a licensing bond or ancillary bond also pays those affected if your business fails to meet other legal obligations in the provision of your services or goods. Bonds do not however, protect you or your business from legal claims by anyone alleging that engaging in business with you resulted in property damage or injury of any type, nor does a surety bond protect you against claims of error or negligence. That is where business insurance comes in.
Business insurance, purchased from an insurance agency, protects your personal and business assets from an array of legal claims as well as protecting your tangible business property, such as vehicles and equipment. Depending on your type of business, where it is located, and how many people are employed by your business, you may need more than one type of business insurance. At a minimum, you will likely need General Liability Insurance. Most types of General Liability Insurance protect you and your business in cases of property damage, bodily injury and medical expense claims, and many include insurance against slander and libel claims and in defending and settling various other types of unexpected business-related lawsuits.
Do I Need to be Bonded and Insured?
Governments require independent contractors and business owners in many industries to purchase a license or permit bond before they can become legally licensed to practice their trade. Federal, state, and local governments and their citizens are protected by these bonds if business do not adhere to applicable laws and regulations. The US Small Business Administration defines being bonded as a signed document, that protects the project owner.
If you plan to do business with the federal government on a product or service contract valued at $150,000 or greater, you will be required to obtain a surety bond either during the bidding period or as a condition of being awarded the contract. If your business has employees, you are required by federal law to have workers’ compensation, disability, and unemployment insurance, regardless of whether or not you are doing business with the government.
State and local government contracts vary in the maximum contract size to require a surety bond, but the rules are similar to bonding rules applied to obtaining federal contracts. Private entities such as non-governmental organizations (NGOs) and corporations will usually require business contracting with them to be bonded, no matter the amount of the contract award. You will need insurance to do business directly with any type of government entity, whether federal, state, or local.
If you only plan to offer products or services to private consumers, your individual state and municipality will have their own requirements on whether you need to be bonded and insured. State and local regulations for business insurance vary in their requirements, depending on the type and size of your operation, where your business is located, and with whom you intend to engage in business transactions.
If you find that you are not legally required to be bonded and insured, obtaining a surety bond and insurance for your business or professional service is almost always recommended. Although claims paid by your surety company will need to be repaid by you, bonds can protect you from losing everything at once and prevent you from having to deposit large sums of cash in lieu of a bond. Regarding insurance, don’t fool yourself into thinking that your chosen business structure can prevent you from liability. Your protection is still limited, and personal and business assets can still be at great risk. In our increasingly litigious society, it is always a good idea to obtain business insurance, especially if you are working with banks.
Surety by NFP only uses top rated bonding companies such as The Hanover Insurance Group, Western National, Liberty Mutual, Philadelphia, Travelers, Great American, Allied/Nationwide, and more. Contact us today for all your surety bonding needs. Quotes are free, and we will point you in the right direction, to get your business running.
What Type of Surety Bond Should I Get?
Surety bonds for businesses generally fall into the category of either commercial or contract bonds. NFP Surety can help you determine the type of bond you need, but we offer the below as an introduction.
Commercial bonds are almost always required to do business with a government entity, although contract bonds are usually required as well. Commercial bonds protect the government and segments of the public in the event of a loss suffered due to the bonded business (the principal) not following applicable laws, rules, or regulations. Permit and license bonds fall into this category.
The surety company will pay the claim on the bond when the principle is unable to resolve the issue themselves. The principle is then responsible for repayment to the surety company. It is in the best interests of the principle to resolve issues before a claim on the bond is made. Certain bond claim activity can result in the cancellation of bonds that are required for licensing and permits.
The second main type of surety bond for businesses is called a contract bond. Contract bonds are sometimes called “construction surety bonds”, since these types of bonds are usually required in the construction industry. Contract bonds apply to other services and product industries as well though. Below are the four main types of contract surety bonds.
- Performance Bond – This is the type of bond that gives customers the assurance they need that your business’ work will be completed as agreed upon and per the terms and conditions of the work agreement.
- Payment Bond – This bond ensures that employees, subcontractors, and suppliers are protected against non-payment.
- Bid Bond – Bid bonds ensure that, if a business is awarded a contract, the successful bidder will, in fact, enter into the contract, make all required payments, and obtain any performance bond required.
- Ancillary Bond – Ancillary bonds ensure that requirements of the contract that are not directly performance-related are followed, such as work site rules and regulations or that certain benchmarks in the project are met on time.
What Type of Business Insurance Should I Get?
Only a licensed insurance agent is qualified to advise you on the type of insurance your biz needs. Although NFP Surety is a surety company, we are an insurance agency, as well. The main types of business insurance are General, Product, Professional Liability Insurance, Commercial Property Insurance, Home-based Business Insurance, and a Business Owner’s Policy. Which, if any, of these policies you need will depend on a variety of factors, including from where and with whom you do business. We will discuss with you the specifics of your business activity and be able to recommend the most suitable policy or policies for your individual business.
How Much Do They Cost?
License and permits bonds are generally very affordable, as the bond amount needed is set by a government entity whose interest it is to encourage business. The costs of other types of surety bonds are impacted by a variety of factors, such as the scope of the coverage, how much coverage you need, the length of time you will need coverage, and your company’s overall financial profile. When underwriting your bond, sureties will consider the financial strength of your company and your current capacity to be successful on the contract. This will include looking at your business equity, debt, cash flow, and working capital, as well as an evaluation of your general character and history of performance.
Bonds generally cost a very small percentage of the total amount of coverage needed. Some are based entirely on the character and financial profile of your company, and others are based on a percentage of the full amount of the contract. Although cost and underwriting guidelines differ by company, most performance bonds, for instance, are generally ½% to 2% of the contract amount. This means that a construction contract totaling $500,000 would require a performance bond payment of just $2,500 – $10,000.
What Does Insured and Bonded Mean
We hope we answered the question. Contact Surety by NFP for all your bonding insurance needs. We are insurance company that offer bonding services, as well as an expertise in all lines of insurance. Call us today at (800) 863-3210 or fill out our quick, online application, and we will work diligently to properly bond you! What does bonded mean? We’ll gladly explain.