In industries like construction or office management services, the term “bonded and insured” may be common on business websites and advertisements. But what does the term mean?

The insured portion is evident to some — bonded and insured businesses have liability insurance to pay for damage awards and legal fees in case of a lawsuit. So suppose an organization, while providing services, causes someone a loss, such as an injury or property damage. In this case, the person who suffered a loss can sue that organization and know that they’ll get compensation from its insurer.

So that leaves us with “bonded”. This article explains what it means for a business to be bonded, the two most common types of bonds companies buy, and how bonds are different from insurance policies.

What does it mean to be bonded? 

If your business is bonded, it means that you’ve purchased a surety bond. A surety bond is similar to insurance as it protects against loss. Specifically, it protects clients against loss if your business fails to meet its obligations. In such a scenario, your client can claim the bond and receive compensation for their loss up to the bond’s limit. Once claimed, the paid-out losses are still recoverable from your business.

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The types of bonds

Like insurance policies, there are different types of bonds. Commercial and contract surety bonds are two of the most common.

Commercial bonds guarantee performances of obligations described in the bond’s fine print. If your business breaks the terms listed in the bond, the harmed individual can claim the bond to recover for their loss. Commercial bonds can come up in situations such as:

  • Obligations as a fiduciary
  • Licenses and permits
  • Lost documents

Contract bonds are similar to commercial ones but refer to contractual obligations. For example, if your contract with a client states that there’s a March 5th, 2021 deadline, and the project remains uncompleted by that time, the client can claim the bond for any losses.

How are bonds different from insurance?

There can be significant confusion between insurance and bonds due to their similarities. But it is crucial to understand the differences:

  • Client makes the claim: With insurance, your business claims and receives compensation from the policy, generally following a lawsuit. But it’s your clients that ultimately claim and receive payment from your bond.
  • Recoverability: After you claim your insurance, your insurer pays you. Although your premiums may increase, the insurance company can’t recover this payout from you later on. With bonds, however, the bond company may come after you in an attempt to recover the payout they made to your client.
  • The bond protects the client: While insurance protects you against a client lawsuit, a bond protects your client. A bond assures a client that working with you involves less risk than an unbonded supplier because the client can claim the bond money if things go south.

Why purchasing a bond is essential for your business

Bonds ultimately provide your clients with a sense of security, and this can benefit your business in many ways:

  • Boost your legitimacy: By telling clients you’re bonded, it shows that you’ve thought out the risks of your business and mitigated such risks. This can show that your business is serious about contracts and that you won’t just take someone’s money and disappear.
  • Opportunity for larger clients: Big clients usually do everything they can to mitigate risks. This includes hiring contractors and other organizations which provide fewer risks to their operations — even if it means paying a higher price.
  • Marketing: Once you purchase a bond, you can add “bonded and insured” to your website to show prospective clients another advantage of hiring you over the competition.

Bonds are a way to help your clients mitigate risk. This can ultimately increase your business’ legitimacy and competitiveness. Bonds also provide the opportunity to close larger projects and clients. Companies choose to purchase Bonds because of the benefits it brings.

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