What does it mean to be bonded and insured?
Small business insurance protects your company from financial losses after unexpected events. And prospective clients often prefer working with companies that carry the appropriate coverage.
Depending on your company’s industry, you may also need to purchase business bonds before clients will hire you.
While insurance and bonds are different, both are key to a business’s risk management strategy.
First things first: What does being insured mean?
Small businesses typically purchase insurance policies to protect themselves against losses and lawsuits in case of unforeseen circumstances. In exchange for paying insurance premiums, businesses gain assurance that they won’t have to pay large sums out of pocket to cover damages or attorney fees and court costs.
A general liability policy is one of the most common forms of small business insurance. It protects against injuries to third parties or damage to someone else’s property.
Small businesses also typically carry professional liability insurance – also known as errors and omissions insurance (E&O) – to cover any lawsuits resulting from unsatisfactory work or professional negligence claims.
Other types of insurance policies that small businesses might need include:
- Workers’ compensation insurance offers assistance with income and medical bills in the event of bodily injury to an employee.
- Commercial property insurance helps cover the cost of repairing damaged property or replacing any stolen goods.
- Commercial auto insurance provides coverage to the policyholder and approved employees who drive company vehicles, as well as for personal errand use.
- Cyber insurance helps cover the cost of notification, credit monitoring, and other expenses if sensitive digital information is jeopardized.
- Commercial umbrella insurance provides additional insurance coverage for claims made on general liability, commercial auto, or employer’s liability insurance.
To see which policies your small business should consider, complete our online business insurance application. You can work with a licensed Insureon agent who specializes in your industry to determine your business’s exact needs.
What does it mean when a small business is bonded?
Surety bonds provide a guarantee that your company will fulfill its contractual obligations. A surety bond involves three parties:
- The principal: The business purchasing the bond
- The obligee: The client that has requested the bond
- The surety: The company that underwrites the bond
A surety bond reimburses the obligee when your company is unable to meet its obligations. Unlike insurance, your bonding company (surety company) will expect reimbursement when it pays for a claim.
For instance, a client hires a telecom cable installation business to wire a new branch office and requires a bond as part of the contract. Halfway through the job, the telecom installer’s project manager resigns, leaving the job unfinished.
The client could file a claim with the surety for the costs of hiring another contractor to finish the project. The original telecom cabler would be obligated to reimburse the surety.
Bond requirements differ in each state and are used in a variety of industries. Three common types of surety bond are:
Construction or contractor bonds
Also called license and permit bonds, this coverage indicates that a construction company or contractor has agreed to comply with the regulations of the government-issued building permit. This type of bond helps assure the client that the company can handle the job.
For example, a client hires a contractor to install plumbing in their new home. Later, a pipe bursts because the plumber’s work was not up to code. The homeowner files a claim against the bond to pay for the property damage, and the plumber must reimburse the surety for that amount.
Janitorial bonds
Professional cleaning companies often carry a janitorial bond, which reimburses clients for incomplete work or employee theft.
For example, an employee of a carpet cleaning business is accused of stealing laptops from a client’s office. If the employee is found to be liable after the surety’s investigation, the client could collect on the bond to replace the computers. Just like the plumber mentioned above, the carpet cleaner would be indebted to the surety.
Fidelity bonds
It's common in the IT sector to have fidelity bonds to protect businesses against employee theft, fraud, and unlawful digital data access or transfers.
First-party fidelity bonds cover damages if an employee defrauds or steals from your company. While this option will reimburse your business in the event of employee theft, it won’t cover damages to a client.
Third-party fidelity bonds protect your clients against the same behavior. Clients will typically request that you purchase a third-party fidelity bond to protect their interests, but you might also want a first-party bond to safeguard your own assets.
For instance, a web developer gains access to a client’s sensitive information and makes an online purchase using their credit card. A third-party fidelity bond would reimburse the client for the amount that was stolen.
If that same web developer hacked into your business’s bank account and embezzled thousands of dollars, a first-party fidelity bond would reimburse you for the stolen funds.
Both first-party and third-party fidelity bonds are types of commercial crime insurance, and may be required to fulfill contract requirements or comply with the Employee Retirement Income Security Act (ERISA).
ERISA fidelity bonds
If your business provides an employee benefit plan, it's required to carry a fidelity bond to meet the ERISA's minimum standards. This type of fidelity bond covers losses to an employee’s retirement plan caused by a dishonest manager.
Lawsuits can cost hundreds of thousands of dollars and can bankrupt an uninsured business.
What's the difference between insurance and bonds?
While being bonded and insured are both forms of a financial guarantee, they aren't the same. Insurance serves your business and protects your assets from legal fees and other unexpected costs. Surety bonds, on the other hand, serve your clients by acting as a guarantee that your company will fulfill the terms of a contract.
Insurance claims are paid directly to your own business. However, in the event of a surety bond claim, the surety company reimburses the client for their financial loss, and then your business must pay that amount back to the surety company.
What are the benefits of being insured and bonded?
Small business owners often find that the advantages of insurance and bonds outweigh the cost of their premiums. The added protection of insurance and bonds can help your business in a few ways:
Protect your company from financial losses
All insurance policies serve the same purpose: to protect your business from financial damage.
The cost of foregoing insurance and bonds adds up quickly. Paying out of pocket to replace a crucial piece of equipment or a damaged vehicle can strain your finances. Lawsuits can cost hundreds of thousands of dollars and can bankrupt an uninsured business.
Ensure clients that you run a legitimate business
Prospective clients want peace of mind that they won’t lose money when working with your business. Carrying the appropriate coverage inspires client confidence that you operate a trustworthy, reputable, and responsible business. It also helps set your company apart from uninsured or unbonded competitors.
Comply with client requirements
Beyond inspiring confidence in clients, insurance and bonds are frequently required before you can win the work. At a bare minimum, most large clients expect their business partners to carry general liability insurance. They may require additional coverage or bonds before they will sign a contract.
Do I need to be bonded, insured, or both?
While almost all small businesses need general liability and professional liability insurance, you might require additional coverage or bonds depending on:
- Your type of business
- Whether you have employees
- Whether you frequently drive for work
- Whether you handle sensitive digital data
You can get free quotes for general liability insurance, professional liability insurance, and surety bonds from top-rated U.S. insurance companies with Insureon’s easy online application. Once you find the right policies for your business, you can begin coverage in less than 24 hours.
Brian Carlton, Contributing Writer
Brian is a contributing writer that has experience covering finance, insurance, and education. He has award-winning journalism and writing experience that covers several topics like insurance, finance, and education.
