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When you’re a contractor, it’s important to establish your credibility with potential customers. That’s why you might see the phrase “bonded and insured” in advertising materials. It’s a great selling point that diligent customers look for. 

But what does it really mean?

 

Understanding Insurance Terms At a Glance: Bonded and Insured

Bonds are similar to business insurance in the sense that both provide protection against financial loss. However, there are significant differences between bonds and insurance. 

Insurance is a form of risk management that guarantees the insured’s losses will be covered or compensated for. Conversely, bonds guarantee that the principal (in this case, the contractor) will fulfill or meet the terms of a contract.

In this article, we’re covering the major differences between both of these terms and why contractors should consider getting both bonded and insured.

 

Insured Contractors

Insurance is a critical business expense for every contractor. There are several types of insurance products designed to cover different circumstances and liabilities. The kind of insurance policy you need depends on your specialty and services. Builders and other construction industry businesses, for example, need a different type of insurance than a service provider such as an accountant

 

What kind of insurance is most appropriate for these groups? Let’s review a couple below:

 

1. General Liability Insurance

Commercial general liability insurance protects your business and reputation from financial loss due to common risks like property damage and bodily injuries. It may also cover the costs of legal defense against lawsuits arising from intangible things like copyright infringement, intellectual property theft, libel, and wrongful eviction. 

In the case you are sued, general liability insurance may cover court costs; this includes legal fees, court costs, and settlements or judgments.

General liability insurance does not cover:

  • Employee injuries: This is covered by workers compensation insurance

  • Vehicle-related injuries or damage: Covered by commercial auto insurance

  • Punitive damages: Costs beyond typical medical expenses and court costs are not covered. Punitive damages usually are awarded for mental anguish and suffering.

  • Intentional acts: If a disgruntled employee destroys property on purpose, the cost is not covered.

 

2. Professional Liability Insurance

Contractors and small businesses alike often carry professional liability insurance in addition to general liability. Professional liability insurance is also known as errors and omissions (E&O) insurance. It covers legal costs when your business is sued for unsatisfactory or incomplete work. Typically, this type of insurance is taken out by professional service providers, like lawyers, real estate professionals, accountants, and medical professionals.

The type of business insurance you need depends on several factors, including your industry, the number of employees you have, and a variety of risk factors. A qualified insurance agent can help you find the right combination to meet your business needs.

 

Bonded Contractors

Even the most reliable, well-intentioned contractors can let customers down. You may be unable to complete a job for many reasons, from a natural disaster to supply chain failure. 

Bonds, also known as surety bonds, are essentially insurance against this failure; it’s a guarantee that your contracting business will make good on the work that’s expected. They are official agreements made between three distinct parties:

  • Principal: The principal is the business owner who purchases the bond.

  • Obligee: This is the person or organization that the bond is intended to protect. Obligees might be, for example, a homeowner, a commercial company, or a government institution.

  • Surety: The insurance agency or insurance company that guarantees the bond.

Diligent customers usually require a bond before they will decide to work with a contractor. 

Bonds provide financial protection for your customers if the project fails. It also outlines the exact parameters of a contract. Bonds give both you and your customers a sense of mutual understanding and trust that the contract terms will be fully met.

 

Types of bonds

There are two different general types of bonds—commercial bonds and contract bonds, also known as contractor bonds or construction bonds, respectively. Commercial bonds are used to protect public institutions, like government municipalities. If you want to bid a landscaping job to beautify a city park, a commercial bond is required. If you fail to follow any regulations, the surety company will cover the damage, but you may have to pay the surety company back.

 

Construction bonds, on the other hand, are typically required by businesses operating in the construction industry. There are several different types of construction bonds:

  • Performance bonds: If you can’t complete the work you contracted for, a performance bond covers the cost of hiring a replacement company to finish the job.

  • Maintenance bonds: Similar to a warranty against defects, maintenance bonds pay out in the event you use defective or faulty materials for a specified period of time.

  • Payment bonds: Contractors are required to buy materials and often hire subcontractors to perform some of the work. If you cannot pay for materials or payroll, a payment bond covers the cost.

  • Ancillary bonds: These bonds cover contract expenses that performance bonds can’t.

  • Bid bonds: Before issuing a bid bond, a surety company does a financial background check on your company. Bid bonds are essentially assurances that your company has the capability of completing the job. Bid bonds are good to have when a small business bids on a large project.

  • License and permit bonds: Permit and license bonds, often required by government agencies, verify that your business will comply with rules, regulations, and laws. 

 

What’s the Cost of a Contractor’s Bond vs Insurance?

Your insurance cost will vary based on many different factors, including the size of your business and number of employees, the industry you work in, your location, and the amount of coverage you choose.

The cost of bonds also depends on several variables. Your company’s credit score and financial information are the most significant influencing factors. 

 

Why Should Contractors Get Bonded and Insured?

Your business may not be required to be bonded and insured by law, but every business can hugely benefit from coverage.

Bonds and insurance show potential customers that your business is legitimate and trustworthy. In some states, bonds can work in your favor as well. If your customer doesn’t pay, a surety bond can help you collect in court.

There is no understating the importance of being covered. Being insured and bonded provides peace of mind and protects your company in the event of a catastrophe or even smaller infractions. Without insurance, if something happens and you are unable to complete the work or shoddy materials undermine your project, your business could be on the line. 

 

Insurance and Bonds with Contractors Liability

Bonds and insurance typically go hand in hand. 

With the right combination of bond and insurance products, your business is covered and your customer’s interests are protected as well. 

If you’d like to find out more about the bonds and insurance to meet the specific needs of your company, Contractors Liability is here to help. Contact us for your free insurance quotes today!