Bonded vs. Insured – What’s the difference?

Insured and Bonded are two terms that are commonly used in business, particularly when discussing contractors or those providing professional services and their requirements.

Let’s start with what it means to be insured…

When you are insured you purchase coverage against a variety of risks and possible financial losses. An insurance policy is a contract between the insured and the insurance company. It lays out an agreement where the insurance company agrees to provide financial compensation in the event of loss or damage.

A few of the most common types of insurance coverage for businesses are:

  • General Liability Insurance
  • Property Insurance
  • Commercial Auto Insurance
  • Professional Liability Insurance

So what does it mean for a business to be bonded?

When a business is bonded it means they have purchased a specific type of insurance called a surety bond. A surety bond is an agreement between three parties that provides a guarantee to fulfill a specific obligation or a certain performance.

There are three parties involved in a surety bond, including:

  • Principal: The party that needs to fulfill an obligation (often a contractor or a service provider).
  • Obligee: The party that requires the bond and is protected by it (often a client or a government agency).
  • Surety: The insurance company that issues the bond and guarantees compensation to the obligee if the principal fails to meet their obligations.

Surety bonds act as a safeguard for the obligee in case the principal fails to meet contractual obligations or perform designated tasks. The surety may cover costs up to the bond’s limit if the principal fails. Beyond that, it is up to the principal to cover the costs.

Some of the most common types of bonds for businesses are: 

  • Contractor License Bond: This type is required in the construction industry. This bond ensures that contractors comply with licensing laws and regulations in their jurisdiction. It guarantees that the contractor will follow proper building codes and conduct business lawfully.
  • Performance Bond: This bond is often used in construction projects and guarantees that a contractor will complete a project according to the terms of the contract, including quality standards and deadlines for completion.
  • Payment Bond: This bond is used in conjunction with performance bonds and ensures that subcontractors and suppliers will be paid by the contractor for their work on a project.
  • Bid Bond: This bond is commonly required in the bidding process for public construction projects. It assures the project owner that the winning bidder will enter into the contract and provide the required performance and payment bonds.
  • Maintenance Bond: After a project’s completion, this bond provides coverage for a specified period (usually one to two years) to guarantee against defective workmanship or materials.

If you need assistance with bonds for your business, please connect with our friendly associates by calling or texting (858) 384-1506. They are ready to assist you!

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