Many people do not know the difference between being insured and being licensed and bonded. While both terms are forms of financial guarantee, they mean different things. Licenses and bonding are designed specially to protect businesses and their customers in the event of accidents, disasters, or errors. When a business says it is bonded, this should not be confused with having an insurance backup. Businesses that claim to be surety bond insured or bonded insured are also not to be confused for one another. To help you understand these terms better, below are some of the things you should know.
What is Insurance?
Insurance is a policy or an agreement that is entered into between a customer and an insurance company, agent, or underwriter. The purpose of an insurance policy is to protect the client from the full financial weight of future disasters. There are different kinds of insurance products and coverage options. Basically, the idea is that a business assesses its risks and buys insurance products that offer coverage for those risks. When disasters happen, the insurance company is notified, and they help out financially as agreed in the contract.
A private individual can take different insurance policies, including homeowners, renters, auto, health, life insurance, etc. Businesses can also take general liability insurance, workers’ compensation insurance, auto insurance, business insurance, etc.
What is Bond Insurance?
Bond insurance offers a higher level of coverage and protection against unforeseen circumstances. In this case, the bond issuer buys a bond that guarantees that they will repay the amount owed and any related interest payment in the event of a default. The bond also covers repayment if one or more of the contract terms aren’t met. Businesses that purchase bonds use this to improve their credit rating while also providing a guarantee for coverage of damages and claims.
What Does it Mean When a Business is Bonded?
A business can be bonded in many ways. Some of the options to choose from include;
Surety Bonds This bond protects a business or individual against claims relating to breach of contract or unlawfulness. A surety bonded business can fall back on this bond when customers claim unsatisfactory results or that the job done was not in line with the rules and regulations of the business. Businesses can also fall back on surety bonds when faced with claims of fraud and theft. To initiate a surety bond, three different parties are required. The principal is the business that purchased the surety bond, the surety who is the company selling or underwriting the bond, and the obligee, the customer who has requested the bond.
With bonds, you are paying a guarantor to take out a bond that will cover you against claims of professional negligence. If such claims are brought up, the surety pays for the claim and gets reimbursed by the business.
License and Permit Bonds – This is a government-required bond to license your business. This type of bond can be issued by your municipality, state, or federal government, depending on the kind of business you are running. Note that this type of bond is not the same across all professions. Each type of business has its type of licensing and permit bond that guarantees that it will work under the set quality standards.
Contract Bonds This bond offers protection to the customer that you, as a business, will fulfill the terms of the contract signed. This type of bond may also be regarded as a performance bond. This is because it holds the contractor to an expectation to deliver according to the signed contract terms.
Fidelity Bonds This type of bond protects the bondholder against fraud or other related acts. This is common among businesses in the IT sector. This bond helps them prove that they are protected against allegations of data theft, cybercrimes, and other fraudulent activities.
How Insurance and Bonds Protect your Business
If you are wondering whether to get either a bond or insurance coverage, it is recommended that you get both. If you are interested in financial protection and the peace of mind that comes with having a backup plan, you need both bonds and insurance policies. Each of these options offers a different level of protection to your business. Insurance policies will protect you from future financial losses, while bonds offer your customers a higher level of trust. Customers who know that your business is bonded are more likely to give you their money, knowing that they are in safe hands.
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