Bonded and insured—those words spell safety when you work with a company. But what does it mean to have an insurance bond?
An insurance or surety bond acts as a layer of protection. You may need the bond to satisfy legal or regulatory requirements when you’re running a business. Even a self-employed contractor may need to procure a surety bond to win a contract bid with a government agency.
An insurance bond is like a contract between two parties. It ensures the principal party meets their contractual obligations. For example, a contractor may be hired to do a certain job. The company who hires him will ask for a surety bond. If the contractor doesn’t perform the work, the surety bond has to pay out. The surety bond acts as insurance for the company that the work will get done.
To understand how surety bonds work, you need to be familiar with the terms. There’s the principal, the person or entity purchasing the surety bond. In the example, it would be the contractor performing the work. There’s the obligee, which is the party who requires the principal to purchase the bond. Finally, there’s the surety, which is the insurance company that issues the bond.
The surety is liable for any claims against the principal up to the amount of the surety bond. If the principal, in our example, the contractor, doesn’t perform the work or comply with the standards set forth by the obligee, the insurance company has to pay the claim.
A surety bond is also a form of risk management, much like other insurance products. With the surety bond, you can protect your interests. Government agencies use them regularly. Depending on the situation, surety bonds may be a requirement to get the contract work done.
Unlike other insurance products, an insurance bond won’t pay for claims. Instead, it provides a financial guarantee that the principal who purchases the bond will meet their obligations toward the other party in the contract. You can use an insurance bond as an extra layer of protection. Most of the time, there is no expectation to receive payment for the bond, because it’s in the purchaser’s best interest to avoid a default.
Public officials who handle money are typically bonded, including tax collectors and constables. But there are other types of insurance bonds, including:
As a business owner, you may need a bond to fulfill contractual requirements. If you work with a government agency or work in an industry where being bonded is a requirement by your state, you can talk to our insurance professionals.
There are many types of surety bonds. An elected or appointed public official may require a surety bond, especially if they handle money. Contract bonds are used to guarantee a contractor’s performance, but it can also guarantee they get paid for their work. Businesses may also use fidelity bonds to protect themselves from fraudulent acts of their staff.
Getting bonded may be a simple or complicated process, depending on the reason behind it. If you expect needing a bond to fulfill a contract, don’t wait to start the paperwork. It may take a few weeks to get a bond. Be prepared to provide financial statements, resumes for business owners, bank references, and the details about the current project.
How much you can expect to pay for a surety bond depends on the type of bond you need. There are a lot of different factors involved, such as your industry experience or financial stability of the entity required to be bonded. If it has to do with employees, their credit score may also make a difference.
If you think you might require an insurance bond, we’re happy to walk you through the process. Call us today and let us know what type of bond you need.