The Difference Between Being Bonded vs. Insured

Being bonded vs. insured are both forms of financial guarantee.

They are designed to protect a person or a business in the event of something going wrong.

However, they are not the same thing.

Being bonded is not insurance.

It can be a little confusing when the terms bond insurance, surety bond insurance are being used, but being bonded is still not the same as being insured.

Being bonded is more like credit, where the risk with the bond lies with the principle, meaning the person buying the bond, not with the insurance company.

Let’s break down being bonded vs. insured a little more:

First off, what is insurance?

There are various forms of insurance.

However, in a nutshell, it is a policy you take you with an insurance company, insurer, underwriter, which will protect you financially in the event of something unforeseen happening.

This can come in the form of a car accident, lawsuit, personal injury, life, etc.

It is a way a person or a business can mitigate risk.

What is bond insurance?

Bond insurance is like an extra level of coverage.

The bond issuer purchases a bond.

By doing this they guarantee that they will repay the principal the sum owed, and any, and all related interest payments in the event of a default, or if some or all of the conditions of a contract are or aren’t met.

A bond may cover additional damages or claims, for example.

Bonds are also used to enhance credit ratings.

What does being bonded mean?

There are many different ways they can bond you, as there are many bonds for you to choose from.

So, let’s have a look at a few:

Surety bond

This form of bond has the effect of protecting you against certain claims of unlawfulness, or breach of contract.

These include claims of unsatisfactory work being done or an uncompleted project.

It can also protect against a claim saying that you failed to work within the law and the regulations of the business.

It also protects against claims of theft and fraud.

A surety bond is a contract between three different parties:

  • The principal is the business who purchases the bond
  • The obligee is the customer who has asked for the bond.
  • The surety  is the company used to underwrite the bond

Basically, you are paying a guarantor to take out a bond.

Bonds are used to cover you against professional negligence claims.

The surety, however, unlike an insurance company, will be reimbursed after it has paid the claim.

License and permit bonds

These are the bonds required by a government body so you can license your business.

These can be in the form of municipal, state or federal level.

Every profession has its own type of licensing bond, and the bond can be valid for a term of one to five years.

The bond is a guarantee that your business will operate in coherence with all the laws and regulations in place to protect citizens of the state.

This bond falls under the wider category of a surety bond and can be called a contractor or construction bond.

Contract bonds

This is also another form of surety bond.

It is a bond that acts as a guarantee that you will fulfill all the terms of a contract.

This bond is sometimes called a performance bond and ensures that an expected standard agreed between the customer and contractor is met.

Since it’s based upon performance, they can agree on timescales, materials used, etc.

The bond is usually given out by the bank or an insurer and the contractor purchases the bond per contact as part of negotiations between the customer and contractor.

It is used to protect the customer and is used to build trust.

It can also help in the event of the contractor goes broke.

Fidelity bond

This bond protects the bondholder against fraudulent acts.

The IT sector uses these types of bonds a lot as it means that their businesses are protected against accusations of theft, fraud, and things such as the accusation of unlawful data transfer, etc.

There are two types of fidelity bond:

  • First-party will protect you if an employee is corrupt and defrauds you or steals from you. It will cover the cost to the business in terms of the theft itself, but it will not protect any damage caused to the client.
  • Third-party protects your clients for the same thing. Some clients will ask you to get a third-party fidelity bond, so they are protected. For your interests, you need a first-party fidelity bond.

Janitorial bonds

These are used by professional cleaning companies.

These bonds reimburse clients in the event of the work being seen as incomplete or unsatisfactory.

They also cover them against any accusation of theft.

How insurance and bonds benefit your business

If you want financial protection and the peace of mind that offers then you need insurance policies and bonds.

Insurance policies all have the same purpose, to protect you from financial loss and damage.

If you do not have insurance and bonds, you will know all about it when things go wrong as the costs mount up.

Lawsuits, for example, can be expensive.

Is it worth the risk?

Bonds offer the client peace of mind too, so it is a way of building trust with them, and may be the difference between you getting a job or one of your competitors.

Does my business need to be bonded vs. insured or both?

Most businesses will already have general liability insurance or professional liability insurance.

However, a bond is generally used to cover additional damages or claims.

There are several factors to think about with getting additional bond coverage depending on the clients, the industry you work for, if you employ staff, if you drive a lot for work or if your company deals in handling sensitive data.

If you have additional questions about being bonded vs. insured, contact us at Keller Insurance Services.