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What does it mean to be bonded?

“Bonds” are perhaps one of the most confusing insurance concepts. There two basic types of bonds a business can purchase:

 

Surety Bonds (thousands of kinds, varying by industry)

Fidelity Bonds (primarily employee dishonesty bonds)

 

A common misconception about bonds is that they exist to protect the policyholder, the contractor. While both surety and fidelity bonds reimburse individuals or companies in the case of incomplete services or theft, they differ in whom they protect. Surety Bonds will protect a customer, while Fidelity Bonds are meant to protect the company.

Surety Bonds

A Surety Bond is often required by a licensing state or municipality. A business that wishes to be employed by the state will purchase a bond amount (determined by the state), which the state will hold secure. Basically, it’s a promise by a guarantor to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract.

 

In the case of a contractor, this means that you purchase a bond that ensures a client, typically the government, that they will be paid back if you fail to finish the job. The purpose of this is to ensure that a client does not need to haggle with an insurance company to receive compensation for incomplete work or stolen items.

Fidelity Bonds

Fidelity Bonds are a company’s internal protection against their own employee’s or contractor’s actions. If an employee embezzles money, for example, an employee dishonesty bond compensate your company. These bonds do not benefit your clients in any way.

What's right for me?

Not every business needs both Surety Bonds and Fidelity Bonds or even need bonds at all. Only you can decide if bond insurance is right for your business.

 

When doing business with another contractor that claims to be bonded, make sure that the type of bond they hold is a Surety Bond, for your own protection.

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