What does it mean to be bonded and insured?
Small business insurance protects your company from financial losses after unexpected events. And prospective clients often prefer working with companies that carry the appropriate coverage.
Depending on your company’s industry, you may also need to purchase bonds before clients will hire you.
While insurance and bonds are different, both are key to a business’s risk management strategy.
First things first: What does it mean to be insured?
Small businesses typically purchase insurance policies to protect themselves against losses and lawsuits in case of unforeseen circumstances. In exchange for paying insurance premiums, businesses gain assurance that they won’t have to pay large sums out of pocket to cover damages or attorney fees and court costs.
General liability is one of the most common forms of small business insurance. It protects against injuries to third parties or damage to someone else’s property.
Small businesses also typically carry professional liability insurance – also known as errors and omissions (E&O) insurance – to cover any lawsuits resulting from unsatisfactory work or professional negligence claims.
Other insurance policies that small businesses might need include:
- workers’ compensation insurance
- commercial property insurance
- commercial auto insurance
- cyber liability insurance
- umbrella insurance
To see which policies your small business should consider, complete our online business insurance application.You can work with a licensed Insureon agent who specializes in your industry to determine your business’s exact needs.
What does it mean to be bonded?
Surety bonds protect against claims of unsatisfactory or incomplete work, failure to comply with laws and regulations, and accusations of theft and fraud. A surety bond involves three parties:
- The principal: The business purchasing the bond
- The obligee: The client that has requested the bond
- The surety: The company that underwrites the bond
Like professional liability and E&O insurance, bonds cover professional negligence claims. Unlike insurance, your bond carrier (surety) will expect reimbursement when it pays for a claim.
For instance, a client hires a telecom cable installation business to wire a new branch office and requires a bond as part of the contract. Halfway through the job, the telecom installer’s project manager resigns, leaving the job unfinished.
The client could file a claim with the surety for the costs of hiring another contractor to finish the project. The original telecom cabler would be obligated to reimburse the surety.
Bond requirements differ in each state and are used in a variety of industries. Three common bond types are:
Construction or contractor bonds
Also called license and permit bonds, this coverage indicates that a construction company or contractor has agreed to comply with the regulations of the government-issued building permit. This bond helps assure the client that the company can handle the job.
For example, a client hires a contractor to install plumbing in their new home. Later, a pipe bursts because the plumber’s work was not up to code. The homeowner files a claim against the bond to pay for repairs and damages, and the plumber must reimburse the surety for that amount.
For example, an employee of a carpet cleaning business is accused of stealing laptops from a client’s office. If the accused employee is found to be liable after the surety’s investigation, the client could collect on the bond to replace the computers. Just like the plumber mentioned above, the carpet cleaner would be indebted to the surety.
These bonds are common in the IT sector and protect businesses against accusations of theft, fraud, and unlawful digital data access or transfers.
First-party fidelity bonds cover damages if an employee defrauds or steals from your company. While this option will reimburse your business in the event of employee theft, it won’t cover damages to a client.
Third-party fidelity bonds protect your clients against the same behavior. Clients will typically request that you purchase a third-party fidelity bond to protect their interests, but you might also want a first-party bond to safeguard your own assets.
For instance, a web developer gains access to a client’s sensitive information and exposes it online without consent. A third-party fidelity bond would reimburse the client for the costs of handling a data breach, including notifying their affected customers and paying for credit and identity monitoring services.
If that same web developer hacked into your business’s bank account and embezzled thousands of dollars, a first-party fidelity bond would reimburse you for the stolen funds.
Why being insured and bonded really matters
Insurance policies and bonds offer advantages that small business owners may find outweigh the cost of premiums. Insuring and bonding your business helps:
Protect your company from financial losses
All insurance policies serve the same purpose: to protect your business from financial damage.
The cost of foregoing insurance and bonds adds up quickly. Paying out of pocket to replace a crucial piece of equipment or a damaged vehicle can strain your finances. Lawsuits can cost hundreds of thousands of dollars and can bankrupt businesses not insured and bonded.
Ensure clients that you run a legitimate business
Prospective clients want peace of mind that they won’t lose money when working with your business. Carrying the appropriate coverage inspires client confidence that you operate a trustworthy, reputable, and responsible business. You’ll separate your company from uninsured or unbonded competitors.
Comply with client requirements
Beyond inspiring confidence in clients, insurance and bonds are frequently required before you can win the work. At a bare minimum, most large clients expect their business partners to carry general liability insurance but may require additional coverage or special bonds before they will sign a contract.
Do I need to be bonded, insured, or both?
While almost all small businesses need general liability and professional liability insurance, you might require additional coverage or bonds depending on:
- your industry
- whether you have employees
- whether you frequently drive for work
- whether you handle sensitive digital data
You can compare general liability insurance, professional liability insurance, and surety bond quotes for your small business from top-rated U.S. insurance providers with Insureon’s easy online application. Once you find the right policies for your business needs, you can begin coverage in less than 24 hours.