Are you bonded? Do you need to be bonded? Should you require that a contractor doing work for you be bonded? And what does being “bonded” mean?

Simply put, bonds are specialized types of insurance guaranteeing specific types of performance.

Because they are so specialized, there are thousands of types of bonds. But they generally fall under three broad categories:

  • Surety Bonds.
  • Licenses and Permits
  • Fidelity Bonds

Here’s a brief summary of how they work:

Surety Bonds

A surety bond is a contract involving at least three parties — the principal, the obligee and the surety.

One party (the principal or obligor) promises to pay a second party (the obligee) if the principal fails to satisfactorily perform or complete a specified task. The surety, usually an insurance company, guarantees that the principal can and will live up to its obligation. A building contractor, for example, promises to remodel / build a home or office. In this case, the contractor is the principal. Their client is the obligee.  The insurance company acting as surety provides assurance that the contractor’s obligation under the bond will be met — even if the contractor alone is unable to.

A common type of surety bond is a performance bond. Some protect the client by covering situations, for example, where a contractor becomes insolvent before completing a project. Some performance bonds assure that a general contractor will pay all subcontractors, suppliers and workers, protecting the client against non-payment liens by these entities.

I often see work trucks and advertisements that say, “Licensed and Bonded”.  Unless their bond lists you as the obligee, that bond likely means little or nothing to the consumer.

 

Licenses and Permits

Government regulations require many businesses to obtain licenses or permits. In effect, the licenses and permits are a specialized surety bond, providing some assurance that the business will comply with applicable laws and regulations.

 

Fidelity Bonds

Fidelity bonds protect a business against illegal actions by its own employees — theft or malicious property damage, for example. These bonds also protect the company against actions by employees while the employees ae performing services for customers — theft from a customer, damage to the customer’s property or substandard work, for example.

 

Summary

Bonds are a basic part of doing business in many situations. We’ve touched on some generalities, but barely scratched the surface when it comes to applications and proper use of bonds.

 

Our company provides and underwrites many types of bonds. Questions about whether you should be bonded and what type of bond you may need? Contact us at 303-922-1001.