While insurance and bonds are not the same things, they are both important components of a company's risk management strategy. Both can safeguard your company from financial losses and assist you in gaining new clients. Business insurance shields your organisation from financial damages caused by unforeseeable circumstances. Prospective clients typically prefer to collaborate with organisations that have the necessary insurance. Depending on the industry your business operates in, you may also be required to obtain business bonds before clients will engage you.
If you are still confused, go through this article till the end. Here, we will discuss what the terms ‘bonded’ and ‘insured’ mean and how they differ from one another. We will also discuss other important matters related to ‘bonded’ and ‘insured’.
Let’s start with the basics then!
What is the meaning of being insured?
Any person or business legally eligible to receive the benefits of an insurance policy, primarily claim payments, is referred to as an insured. Insurers compensate insureds when they suffer a covered loss, injury, or damage that qualifies for payment under the terms of the policy. This could involve damage to the person who acquired the policy or a third party's property.
Businesses usually obtain insurance coverage to protect themselves against unforeseen losses and lawsuits. In return for paying insurance premiums, businesses obtain assurance that they will not have to pay huge sums themselves to cover damages, lawyer expenses, court costs, and so on. One of the most prevalent types of business insurance is general liability insurance. It protects against third-party injuries or damage to someone else's property. Professional liability insurance often referred to as errors and omissions insurance (E&O), is typically adopted by small businesses to cover any litigation resulting from poor work or professional negligence claims.
Businesses may also require the following insurance policies:
- Directors’ and Officers’ (D&O) insurance
- Workers’ compensation insurance
- Cyber liability insurance
- Commercial auto insurance
- Commercial property insurance
- Commercial general liability insurance
- Product liability insurance
- Professional indemnity insurance
- Employee benefits insurance
- Business interruption service
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What is the meaning of being bonded?
The term "bonded" refers to the acquisition of a surety bond that provides limited assurance to a customer, called the obligee. In a three-party contract, one party (the surety) guarantees the obligations of a second party (the principal) for work done for or on behalf of a third party (the obligee). In essence, a surety bond is a commitment that if the third party fails to perform whatever is expected, the surety will pay to compensate the affected party. In this sense, the bond serves as an assurance to the obligee that the principal is addressing risk.
A general contractor, for example, is hired by the proprietor of a construction project to build a warehouse. The proprietor needs the project completed before a certain date. He would then ask the general contractor to acquire a surety bond from an insurance company guaranteeing that the work will be completed on time. The surety bond offers numerous advantages. The proprietor is pleased since the general contractor will be encouraged to complete the job on time and will be compensated if it goes late. The general contractor is motivated to complete the job on schedule because he would not want to pay back the surety, in case of a failure to complete the project on time.
Bonded vs Insured: How do they differ?
The distinction between being bonded and being insured is that a bond protects a third party whereas insurance protects both the claimants and policyholders. Being "bonded" refers to the purchase of a surety bond that provides limited assurance to an obligee (customer). Meanwhile, being " insured" means that you have an insurance policy that, unlike a bond, protects against liabilities and damages.
Other important differences between these two terms are as follows-
- A bond provides protection against an individual or company failing to fulfill its contractual obligations. On the other hand, insurance provides protection against financial losses from specific events such as third-party claims of damage or injury.
- The life cycle of a bond ends once it is paid. After that, new bonds need to be purchased, if a need arises. On the other hand, an insurance cover can pay multiple claims within the policy period, provided the specified limits are not exhausted.
- The amount of protection provided by a bond is limited to the bond amount, while the amount of protection provided by insurance depends on the policy and the coverage limits specified in the policy.
- Bonds are often required by law or by business partners. Insurance is usually optional, although it is recommended to protect against financial losses. At times, business partners also demand the availability of certain types of insurance coverage.
Bonded vs Insured: Who needs both?
You may be needed to be both insured and bonded if you work in maintenance, construction, or financial services. Many contracts, particularly those in the construction industry or with government organisations, will mandate that you should have both a bond and insurance.
While a bond and insurance both have their own sets of advantages, there are some advantages to having both:
- Because bonds and insurance both cover diverse scenarios, having both together can broaden your coverage.
- Provides customers with the much-needed trust in your company
- You can have multiple guarantees. If something goes wrong, whether it's the project running late or property damage, you would know that there is protection. This will allow you to complete the contractual requirements related to the project, with peace of mind.
What are the different types of bonds?
There are various types of bonds, just as there are various types of insurance policies. Surety bonds are classified into two types: contract bonds and commercial bonds.
- Contract bonds- These bonds guarantee a specific contract and are commonly used in the construction business, Contract bonds are further classified as follows:
- Performance bonds- They ensure that the project is completed as specified in the contract.
- Supply bonds - They ensure that suppliers will provide the materials and items specified in a contract.
- Maintenance bonds- These bonds are similar to warranties where they ensure that any faulty work will be rectified for a period of time after the job has been accomplished.
- Bid bonds- These bonds ensure that a job proposal was made in good faith and are typically followed by an agreement to bond. This means that if the work is awarded to you, you will purchase the necessary bonds, such as a performance bond.
- Subdivision bonds- They ensure that work requested by government agencies is executed correctly, on time, and in accordance with local laws.
2. Commercial Bonds- These bonds guarantee the provisions of the bond. These are mostly obtained by businesses such as car dealers, travel agencies and notaries
Other types of bonds also exist which are not surety bonds. Some of them are as follows-
- Fidelity bonds- These bonds are prominent in the IT industry and safeguard companies from fraud, employee theft, and unauthorised access or transfer of digital data. First-party fidelity bonds protect your organisation if an employee defrauds or steals from it. While this option will compensate your organisation in the event of employee theft, it will not cover customer damages. Third-party fidelity bonds shield your customers from similar activity. Customers will usually seek a third-party fidelity bond to safeguard their interests, but you may also need a first-party bond to protect your own assets.
- For example, a web developer acquires access to a client's sensitive information and uses the client's credit card to make an online transaction. A third-party fidelity bond would compensate the client for the amount lost. If that particular web developer got into your company's bank account and stole thousands of money, a first-party fidelity bond would compensate you.
- Bail bonds- In a business context, bail bonds refer to the services provided by bail bond companies, which act as a financial guarantee for the release of an accused person from jail. The bail bond company charges a fee for this service, typically a non-refundable percentage of the total bail amount, and may also require collateral from the accused or a co-signer. Bail bond companies make a profit from the fees charged for their services, and the bail bond industry can be a lucrative business for those who provide reliable and trustworthy services. Bail bonds are a key component of the criminal justice system, as they allow accused persons to be released from custody while they await trial, while also ensuring that they will appear in court as required.
