What is the Difference Between a Bonded Business and an Insured Business?

When looking to protect your business, you may find many options—two of which are insurance and bonds. These two are not interchangeable, however, and there are stark differences between bonding your business and insuring your business. It is important to know the difference so that you can protect your business with the right coverage. 

Bonds vs. Insurance 

The key difference between bonds and insurance is that while insurance is a one-way contract (wherein the business pays an insurance agency for coverage), a surety bond is a three-way contract between the business, the surety and another entity. 

Most bonds a business enters are bonds with the state in which they operate. By purchasing a surety bond, the business promises the state that they will operate under a certain set of guidelines. If they fail to do so, the surety promises to pay the state compensation, which they may seek reparations for from the business. These bonds are often used to protect your reputation as a business. 

Surety bonds are not a replacement for insurance or vice versa. Both serve different purposes and are equally important. 

Are Surety Bonds More Expensive Than Insurance Policies? 

The cost of a surety bond depends greatly on the type of bond and, in case of contract bonds, the size of a project. A surety often calculated how much a business will pay for their bond depending on the business’ credit. Businesses with poor credit will likely pay more for an insurance bond. If a project must have a surety bond of $20,000 and the surety quotes you for 1%, you must pay $200. 

Unlike an insurance policy, surety bonds are generally one-time payments whereas insurance policies are paid on yearly or monthly basis in return for coverage. This also means that once a single surety bond is completed, you may need to purchase another for the next project. 

Surety Bond Requirements vs Insurance Requirements 

Both surety bonds and insurance policies can be required by the state. Some insurance policies are required by lenders while many surety bonds are required by clients. For example, lenders will generally require business owners to carry property and liability insurance for the building they purchase for the business. 

Some of these requirements overlap and a few businesses may require both insurance and a surety bond in able to operate. 

Be sure to shop around and speak with an insurance agent and others within your industry to discover if you need a bond or insurance, or even both.