What Does Bonded And Insured Mean? (2024)

Having business insurance and bonds can help safeguard a small business.

A business insurance policy protects your business from financial losses after unexpected problems—and clients sometimes want to work only with companies that have business insurance. Depending on the industry you work in, you may also need to buy bonds before clients will hire you. For example, construction businesses typically purchase a bond before working with a client.

What Does ‘Insured’ Mean?

“Insured” simply means you have purchased insurance. Small business insurance can pay for a range of problems, from physical losses like a fire to lawsuits against your business.

General liability insurance is often the foundation of a good small business policy. It can:

• Pay claims against your business relating to bodily injury and property damage.
• Help a small business remain financially viable if you’re sued by a customer or other business.
• Pay lawyer costs, court costs and legal judgments if you’re sued over a problem covered by the policy.

Your small business might need other types of small business insurance, such as:

• Business interruption insurance replaces your lost income if you need to temporarily close due to a problem covered by your policy (such as a fire). This coverage is also called business income insurance.
• Commercial property insurance covers the physical location of your business and your company’s equipment, such as computers, office furniture, tools, materials and inventory if it’s damaged due to problems like severe weather, fire, theft or vandalism.
• Commercial auto insurance covers the vehicles you use for work, like trucks, vans and cars. Your personal auto insurance won’t cover work-related accidents.
• Professional liability insurance covers mistakes and errors you make in your services, even if the claim has no merit. This coverage is also called errors and omissions insurance.
• Workers’ compensation insurance covers your employees for job-related injuries and illnesses. You’re required to have it in most states if you have any employees.

A good way to get business insurance is by purchasing a business owners policy (BOP). A BOP bundles together general liability insurance, commercial property insurance and business interruption insurance. It’s generally cheaper to buy a BOP than to buy each coverage type separately. You can add to your BOP as needed, such as adding commercial auto insurance and workers’ comp.

What Does “Bonded” Mean?

“Bonded” means that you have purchased a surety bond to protect your business against claims of shoddy, incomplete work, or allegations of theft and fraud. A surety bond has three parties:

• Principal, which is the business buying the bond
• Obligee, which is the client requesting the bond
• Surety, which is the company that underwrites the bond

Bonds cover claims of negligence in the workplace. For example, let’s say a construction contractor buys a bond at the request of a client. If the work is shoddy and ultimately goes unfinished, the obligee could file a claim with the surety company for the cost of hiring another contractor to finish the project properly.

Types of Bonds

The type of bond your small business needs will depend on the kind of work your business performs. Common types of bonds include:

• Commercial bonds. This bond may be required if your business works on projects with a government or municipal entity. This bond covers the public institution if your business does not properly follow applicable laws, regulations and rules. Examples of commercial bonds include license and permit board bonds, liquor bonds and mortgage broker bonds.
• Contract or construction bonds. With construction or contract bonds, the construction company agrees to comply with government regulations detailed in the building permit for the construction job. Common types of contract bonds include ancillary bonds, bid bonds, payment bonds and performance bonds.
• Fidelity bonds. This bond pays an employer if there are financial losses caused by dishonest employees who commit fraud against the company. It’s also called a first-party fidelity bond. A third-party fidelity bond is also available and can protect customers from the dishonest actions of a company’s employees.
• Janitorial bonds. A cleaning company will often carry this type of bond. It will pay clients if your work is unsatisfactory.

What’s the Difference Between Insurance and Bonds?

The key difference between insurance and bonds is who gets the money if a claim is filed:

• Business insurance compensates your business for losses covered by your policy. For example, if you accidentally cause property damage to someone else, your general liability insurance can pay to repair or replace the damaged property. The insurance will also pay for your legal costs if you get sued over an accident that’s covered by your policy.
• A bond pays your client. If your client files a claim for a problem like incomplete or shoddy work, the surety company will pay your client the cost to rehire another company to complete the work. Your business will have to reimburse the surety company.

Benefits of Being Bonded and Insured

Having both insurance and a bond can give customers confidence that your business is legitimate and that they won’t be left holding a large bill if you fail in your work. Plus, many large clients require business partners to have general liability insurance and bonds.

Without the right bonds you may not get business from certain people. And without insurance you’ll end up paying for liability claims and property damage out of your own pocket.

The Costs of Getting Bonded and Insured

Some bonds you pay with a set premium. Other bonds are paid for as a percentage of the coverage amount you want. Contract and fidelity bonds are paid this way and usually cost between 1% and 3% of the full coverage amount. For example, if you buy a $50,000 bond, you might expect to pay between $500 and $1,500 for a contract or fidelity bond.

The cost of a surety bond is calculated as a percentage of coverage but usually at a higher rate, as much as 15%. This percentage is paid as an annual premium.

The Small Business Administration will often guarantee surety bonds in an effort to help small businesses compete for work. So check with the Small Business Administration if you need a surety bond.