The Meaning of Getting Bonded

construction workers on a job site looking over paperwork

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If you're just getting started as a contractor or the owner of another type of service-based business, you may be trying to figure out whether you need to be bonded. Because bonding goes hand in hand with licensing and insurance, let's quickly go over the meanings of all three of those terms before focusing on the advantages of being bonded.

Licensing: Depending on what type of business you have, you may need a license to operate in your state. A license signifies that you have the necessary training and meet the requirements needed to complete the job you are attempting to get hired to perform. Some examples of business people who may need to be licensed include medical professionals; attorneys; hairdressers, barbers, and cosmetologists; accountants; home improvement contractors; real estate agents; and handlers of food or alcoholic beverages. 

Insurance: When a company is insured, it means the business is protected from financial losses related to events in the workplace. There are several types of business insurance that protect the business from a variety of risks, including property damage, lawsuit payouts, and lost income. Small business owners who are just getting started should discuss their insurance needs with a qualified insurance advisor before they start providing services to customers. 

Bonding: While insurance offers protection for the company, bonding offers protection to a business's customer. If something goes wrong, the customer can file a claim against the company, and the bond purchased by the company will cover the cost of the claim, provided it is deemed to be valid. In its simplest terms, bonds are meant to protect consumers from harmful, unethical, or otherwise poor business practices.

Two Types of Bonds

There are two different kinds of bonds a business owner can purchase: fidelity bonds and surety bonds. 

Fidelity Bonds

A fidelity bond can be considered a supplement to business insurance because it provides protection for both the customer and the business from theft, misconduct, or fraud on the part of the company's employees.

If a company's employee is performing a service in a customer's home and steals something, a fidelity bond can be used to cover the cost of the employee's misconduct and the company is not held directly liable for the damages caused by the employee. So while a fidelity bond is primarily protection for the customer, it also protects the business from errant behavior on the part of its employees.

Surety Bonds

A surety bond, which can also be called a performance bond, provides the customer with a guaranteed assurance that the services will be provided as agreed. There are three parties involved in the purchase of surety bonds:

  1. The Principal: The principal is the company that will be providing the services and the purchaser of the bond.
  2. The Obligee: The obligee is the party that requires the bond in order for the principal to do business, usually a state or municipality. In some instances, the obligee is another company, such as when a subcontractor is working for a general contractor.
  3. The Surety: The surety is the insurance company that issues the bond.

Here is an example of how bonding works in the case of a surety bond: Let's say a construction company purchases a bond either because it is required by the state the business is operating in or as a guarantee of the quality of work they will perform for customers. The company is hired to build a deck for a customer, and during the course of the project, the company damages part of the siding on the customer's home. The customer asks the company to repair the siding, but the company can't or won't fix the damage. The customer can file a claim with the surety company, and if the claim is found to be valid after an investigation, the customer will be repaid from the bond the company purchased. The customer can then use the money paid through the bond to hire another company to fix the damage.

Reasons to Be Bonded

You will need to be bonded if your state or municipality requires it. In addition, if your business frequently performs services in customer's homes or on the premises of other businesses, you should strongly consider getting bonded to protect your customers and your business's financial health. 

Although being bonded is primarily protection for the customer, it can also provide your business with financial stability in the case of a dissatisfied customer. In the unfortunate event a customer makes a claim against your business, the compensation needed to settle the claim would come from the bond and won't impact your immediate operations.

Being bonded provides a layer of trust between your business and your customers because you are giving them assurances to the quality of your work while providing a way for them to be made financially whole if something goes wrong.

When your business is bonded, it can send a message to prospective customers that you are professional, credible, and ethical.

If you're unsure whether you need or ought to be bonded, you can consult an attorney, a surety or insurance company, or another qualified bond specialist who can advise you on your individual situation.

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