“You want to find a contractor that is bonded and insured.” 

You hear this sentiment echoed all the time, from contracting companies screening new hires to homeowners considering a renovation. And it’s absolutely true. As a contractor, being insured and bonded is a fundamental part of the job description.To compete in the job market as a general contractor, you’ll need to have the right qualifications. For some small businesses, proprietors can choose whether they want to be insured and bonded. Many large companies, however, will request these qualifications before licensing their staff, and in some cases, it is required by law. While it’s not always required to be insured and bonded, it is almost certainly recommended.It’s worth noting that many professionals must be ‘bonded and insured,’ not just contractors. Professionals of all kinds, from moving companies to cleaning services, can be insured and bonded. 

Bonded vs. Insured

So, what exactly does it mean to be bonded and insured? Is there even really a difference? Well, yes. Although they may be similar, there are a few significant distinctions between insurance and surety bonds—five, to be exact. Read on below to learn more about insurance and surety and how they may affect you and your business. 

1. The Contract

Insurance 

This is a form of risk management, and it exists in virtually every area of life. For instance, car insurance protects against the costs of accidental damage. Health insurance covers a percentage of the costs incurred by medical expenses. Life insurance offers a payout to your loved ones after you die. The overlapping feature here is that you, the insured, pay a premium in exchange for financial compensation in the event of damage, a loss, or an unexpected expense. Essentially, insurance is a formal contract between two parties: the insured (you) and the insurance company. It’s a promise that the insurance company will provide a payout in the event of a covered loss.

Surety Bond

Like insurance, a bond is a form of coverage, but unlike insurance, the agreement occurs between three or more parties. The three parties in question are the surety (the party that issues the contract), the principal (the party upon whose behalf the contract is issued), and the obligee (the party to whom the principal is contractually obligated). The bond guarantees that the principal will fulfill a duty to the obligee, and if the duty is not met in full, the obligee can recoup their financial losses. Say, for instance, that a painting contractor wins the bid to repaint lines on a county road. However while painting the lines, the contractor makes a mistake and does not paint the lines according to the specs the engineer provides. The county would likely incur a financial loss in fixing the contractor’s mistake. Having a bond in place ensures that the contractor take on the expense of fixing the error. If bonded and the contractor does not fix the error, the surety company would cover the cost to fix the error up to the bond penalty amount. The difference from insurance however is the surety company has the option to after the contractor for not holding up their end of the contract, recouping any financial lose the surety company paid out.  

2. The Coverage

Insurance

An insurance contract protects you, the insured, from any costs incurred on the job site. For instance, if you are working as a home contractor and one of your crew members falls off the roof and breaks their leg, your insurance company will compensate you and your teammate for medical costs and/or time lost.

Bond

A surety bond protects the obligee – that is, the party that is employing your services. 

3. The Premiums

Insurance

The premium you pay for insurance means that you are covered for potential losses. There’s a slight chance that the potential losses may not even happen. But if it does and you don’t have insurance, the result could be financially catastrophic. Effectively, your insurance premium exists to offer financial peace of mind.

Surety Bond

The premium paid for a surety bond is a guarantee that the principal follows through on their obligations. Essentially, it’s a binding legal document that holds you, the principal, accountable for your actions. You must follow through and meet the obligations as stipulated in the contract. 

4. The Losses

Insurance

Typically, losses are expected, and your insurance rates are adjusted to reflect that. Your insurance rates can depend on many factors. For instance, if you have a history of car accidents, the premium on your car insurance is going to skyrocket. Because you are accident-prone, you are a high risk – that is to say, expensive – party to insure. Insurance companies also have very different ideas about what counts as a ‘covered loss,’ so it’s essential to investigate that before selecting an insurer.

Surety Bond

With bonds, losses are not expected. Instead, they act as a safety net for the obligee in case of a principal’s error or carelessness. Because of this, surety bonds are typically only issued to qualified parties – either individuals or companies – whose work requires a contractual guarantee. 

5. The Claims

Insurance

After a claim is paid out, the insurance company typically does not expect repayment from the insured.

Surety Bond

Because a surety bond is a form of financial credit, you, as the principal, are required to pay out any claims from the obligee.To put it briefly, insurance protects the professional from financial loss; a surety bond protects the customer against breach of contract by the party whose services they’re employing. As a contractor, it’s in your best interests to be insured and bonded. Not only does it communicate a higher caliber of service and accountability, but it also protects you and your employer from financial loss. While it may seem complex, time-consuming, or expensive to procure these services, it’s almost guaranteed that a job site loss will be far more laborious and costly to rectify. To be a contracting professional, it’s important to dot every i and cross every t. When you are insured and bonded, you are showing customers that you care. You care about the work you do and the clients you serve. You care about the quality of your output and the well-being of your team members. Most importantly, you care about getting the job done right… and that’s the sign of a true professional.To learn how to become insured and bonded today, connect with us at ZipBonds.

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