What Does Being Bonded and Insured Mean? Your Ultimate Guide

What Does Bonded Mean?

Nope, it has nothing to do with James Bond.

Being “bonded” means you’ve secured extra money to pay your customers if you fail to follow through on your work. In short, it gives your customers a fallback plan and peace of mind. Often, it’s even required before you are hired for a job.

You may think you’ll always be able to complete your work correctly and on time. But we’re all human, which means we’re prone to mistakes sometimes.

Plus, circumstances beyond your control can potentially prevent you from adhering to your contract obligations.

Have you thought about what might happen if:

• You get sick and can’t complete the work you agreed to do?
• Your business suddenly closes due to a natural disaster?
• The project fails, despite your best intentions?
• An employee quits, and you’re unable to complete the work on your own?

Any of these situations can happen to even the most qualified small business owners. That’s why surety bonds exist. If you can’t fulfill the obligations of your contract, a surety bond may be able to protect your customer financially.

Depending on your industry, you may even be required to have a bond. For example, most contractors need to obtain construction bonds before starting work on a project.

Here are a few other reasons to get a bond:

• You may be more likely to get hired. Being bonded offers your customers an additional level of protection — and that’s enticing.

• It can build trust with your customers. Having a surety bond speaks volumes about your level of professionalism. It demonstrates to current and potential customers that you’re likely trustworthy.

• It helps protect your customers if the project falls through. If a worst-case scenario occurs, a bond can help protect your customers financially. In turn, this can give them — and you — peace of mind.

Next, let’s talk lingo. If you decide to get a bond, you may hear these common terms, so you’ll want to know what they mean:

• Principal: The principal is the business owner who actually buys the bond (that’s usually you). Usually, it’s the owner of the company that is providing the services.

• Obligee: This is usually your customer. It’s the person or organization that the bond protects. Usually, an obligee is a government institution that requires a bond before hiring your company.

• Surety: This is the agency or company that issues you the bond.

There are two main types of bonds — commercial bonds and contract bonds. So what’s the difference?

In general, a commercial bond helps protect public institutions from financial losses. If a principal doesn’t adhere to laws or regulations, a surety provider can step in to cover damage. Then the principal may be on the hook to pay back the surety provider.

A contractor bond, also known as a construction bond, is usually required in the construction industry. But professionals in other industries may rely on them as well. Here are a few types of construction bonds to become familiar with:

• Bid bonds. Bidding on a large project? You may need a bid bond to get hired. They guarantee that you, as a contractor, have the financial and employee resources needed to complete the work. An agency can issue you a bid bond after conducting a financial and background check on your company.

• Performance bonds. Let’s say you can’t follow through on your work obligation. This is where performance bonds can take action. Designed to protect your customer, a bond company can use a performance bond to hire another contractor to finish the job.

• Payment bonds. If you’re a contractor, you likely buy materials and hire subcontractors. But if you don’t pay your bills on time, your customers may be approached for payment after the work is done. A payment bond can help cover these costs.

Want to know more? Simply Business dives deep into the world of construction bonds in this helpful article. Check it out here.

What Does Being Insured Mean?

Now that we’ve discussed what being bonded means, let’s move on to the next question — what does it mean to be bonded and insured?

Million dollar question — if you have a bond, do you need to get business insurance too? After all, don’t you already have enough protection?

Not so fast, partner.

Business insurance works very differently than surety bonds in several ways. Here are the main differences:

Surety bonds:

• Can help protect your customers if you fail to follow through on your commitment.
• Are issued by surety companies that have deemed your company reliable.
• Must be repaid by you, as the business owner.

Business insurance:

• Protects you as a business owner in the event of an accident, injury, property damage, or loss.
• Is provided by insurance companies that offer business policies.
• Holds insurance companies — not business owners — responsible for the cost of claims (in accordance with the policy).

Business insurance is extremely important for most companies, both large and small. It’s designed to protect you financially if you face an accident, property damage, injury, and more. Without business insurance, you may be left to cover the costs of a claim on your own.

For most business owners, an incident could be financially devastating — and be enough to close you down. Think about this: Reputational damage is the most expensive claim, with the average cost a whopping $50,000 without coverage. Could you pay that amount on your own?

If not, you’re not alone. Most small business owners may have trouble paying it.

But if you have business insurance, your policy could pay for that claim (up to your policy limit). And if you have a $0 deductible, you likely won’t have to pay a single penny out of pocket.

Those are some serious benefits to being bonded and insured!

Convinced yet? If so, here are a few types of business insurance policies you may want to get:

• General liability (GL) insurance. This policy can help cover the costs of bodily injury, property damage, and third-party accidents. Imagine if one of your customers trips and falls over your equipment and gets injured. Without insurance, you could be on the hook to pay for their medical bills. With GL insurance, though, you may be financially protected.

• Professional liability (PL) insurance. If you offer services or consult with clients, this policy is for you. PL insurance can help protect your business’s finances if a client sues you for negligence related to the job. Say you’re a photographer and you accidentally deliver photos to the wrong client? If you face a lawsuit and have PL insurance, you may be protected.

• Workers compensation insurance. Have employees? Even just one? Then you probably need to get workers compensation insurance too. This coverage typically protects your business if an employee gets sick or injured on the job. Without it, you could be responsible for paying for their medical bills, lost wages, and even job rehabilitation.

Want to know more about the benefits of business insurance? Find your profession or industry, and check out Simply Business’s content designed for you.

And if you’re ready to see what type of insurance you need, just check out this free quote tool. In under ten minutes, you could see policy options from the nation’s top insurers, with general liability options starting as low as $21.25/month.*

Getting Licensed: Why Being Bonded and Insured Matters

Do you need a business license to perform your line of work?

Many professionals do. Take contractors, for example. In most states, it’s mandated by law that they carry business licenses before executing work with customers. Otherwise, they may risk having to pay hefty fines.

Thankfully, it’s not too difficult to secure a business license, and Simply Business offers a state-by-state guide to getting your business license fast.

If you’re a contractor, there’s even more state-specific information for you. Check it out!

But are you wondering how business licenses relate to bonds and insurance? It’s simple. Most contractors and other licensed professionals need to be bonded and insured before obtaining their licenses.

That’s because state governments and local municipalities want to make sure you’re a reputable company and are prepared to protect your customers and employees. Basically, the government is just looking out for consumers.

Here’s a recap:

• Surety bonds can help protect your customers if you’re unable to perform your obligated work. They step in to help pay for damage and wrap up the job until you’re able to reimburse your bond.

• Business insurance helps protect you, your company, and your employees if there’s an accident, injury, negligence, or property damage. It’s designed to protect you rather than your customers.

• Business/contractor licenses put it all together. To get a license, you’ll need to take multiple steps, including getting bonded and insured. A business or contractor license (or both, depending on your state) helps meet legal requirements and demonstrates that you’re fully trained and prepared to execute the work.

Bonded and Insured: You’ve Got This

It may seem like we’ve gone through a lot of administrative work. But in the end, you’ll appreciate being official, especially if you’re in a high-risk industry, like construction. After all, it can be fairly common in the construction industry for injuries and project delays to occur.

Being licensed, bonded, and insured speaks volumes to you as a professional. That’s why you may see companies touting “Licensed and Insured” on the sides of their vehicles. Customers want to know that you’ll take the extra step to protect them if a project goes awry.

They also want peace of mind knowing that they’ve hired a trustworthy professional.

If you’re ready to pursue your business license, but not sure how, head over to our easy guides. As I mentioned, Simply Business has a guide for general professionals and a complete business licensing by state guide just for contractors.

Just remember, you won’t regret putting in extra effort to get a business license — or being licensed, bonded, and insured. These are steps that can keep your customers satisfied and help establish credibility for your business.

*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on July-September 2023 data of 10% of our total policies sold.