Have you ever been asked to post a bond as a means of insurance? Bonding as a means of commercial insurance can cause a lot of confusion and headaches. Often, this is because many mistakenly lump insurance and bonds together in the same category and seek out “bonded insurance.” Though there are similarities, bonds and insurance are different. In this blog post, we’ll define what it means to be bonded so you know the benefits for your business and your clients.
At the most basic level, a bond is a guarantee of something. With any bond, there are three parties:
- Obligee– the party requiring you to post the bond
- Bonding Company– the institution backing the bond
- Principal– the party who is being bonded.
Different Types of Bonds:
There are actually two different bond products that often get grouped together, though they have different purposes.
- Surety Bonds– A surety bond is a guarantee that your business will follow the states rules and regulations. They are often required by a third party (typically the government) to do business. There are thousands of surety bond requirements throughout the U.S. With this type of bond, you pay the bonding company a percentage of the bond amount to make the guarantee on your behalf. This bond does not protect you; it protects your clients. Think of a surety bond as insurance for your clients that you are paying for.
- Fidelity Bonds– This type of bond provides insurance for your company against employee dishonesty and theft. Should your company suffer from employee embezzlement, the fidelity bond will reimburse your company for losses. There are several types of fidelity bonds that protect you against different scenarios: theft of your employees from your clients, employee embezzlement, theft, perjury, etc. ERISA bonds are required, as they protect against fraudulent handling of employee benefit plans such as 401ks.
Bonded vs Insured:
When businesses advertise that they are “bonded” they could be referring to their surety or fidelity bonding. Fidelity bonds are an insurance product for your company. They work in the same way as property and casualty insurance. However, surety bonds are different.
Surety bonds are insurance for the obligee (the party requiring you to post the bond). You are expected to reimburse the surety for claims, which actually makes surety bonds a form of credit to you. Collateral is almost never required (as opposed to a letter of credit); the bonding company is guaranteeing that “you are good for it” when it comes to paying claims.