The Difference Between Being Bonded and Insured as a Business

"Surety bond" typed out on paper with a pen pointed at the words and a glasses lens encircling the words.When starting a business, the surety bond process can be quite confusing and might not even be on some business owners’ radars. Business founders are typically quick to purchase business insurance to safeguard their investment, but many aren’t immediately aware of the need for a surety bond. Furthermore, they might not even understand how it differs from insurance. Fortunately, we’re here to help explain the difference between being bonded and insured as a business and under which circumstances you require a surety bond.

The Difference Between Being Bonded and Insured

Both surety bonds and insurance provide protections and financial reimbursements to an extent, but these agreements are dissimilar in a lot of ways. Let’s look at the differences between the two:

What is a Surety Bond?

Surety bonds are a three-party agreement. The principal, surety company, and obligee (the entity in need of the bond) enter into a contract that guarantees specific tasks will be completed, or else the obligee can make a claim from the bond. If the specific tasks outlined are not met, the principal is obligated to pay back the claimed funds to the bond. Furthermore, surety bonds:

  • Require the principal to pay premiums, in addition to loss reimbursement.
  • Have premiums that only cover expenses, not losses.
  • Often can’t be canceled until the project is fulfilled or a release is obtained.

In a sense, a surety bond is similar to a credit extension to the principal by the surety.

What is Insurance?

Unlike a surety bond, insurance is a two-party agreement between the insurance carrier and the insured. With insurance, the insured is required to pay the premium, and in exchange, they can claim loss benefits from their policy. No claim reimbursement is requested by the carrier, and the insured is entitled to cancel their policy at any time.

How Do I Know If I Need to Get Bonded?

When starting a business, you’ll need all the help you can get. Some of the most common situations where a surety bond is needed include:

  • Business Services Bond: If your business requires you to enter other’s homes or businesses, you may be required to have this form of a dishonesty bond.
  • Notary Public Bond: If you’re applying to become a notary with the privilege of notarizing documents, you might be required to have this bond.
  • Probate Bond: If you’re appointed as a conservator, administrator, or guardian of a child or incapacitated person, the court may require a probate bond.
  • License and Permit Bond: If you are a contractor performing a job in a new city, the city might require license and permit bonds.

There are several other types of surety bonds, such as those needed to provide employees with a pension or 401(k) plan, and it can get confusing. If you have any questions, reach out to your insurance agent, and they can help.

Do I Need Business Insurance If I Have a Surety Bond?

Despite surety bonds protecting business owners from those who fail to fulfill contractual obligations, you still require business insurance to cover potential losses incurred by negligent acts, natural disasters, or other covered events. A surety bond protects the obligee who contracted with the principal, providing reimbursement if the tasks are not performed, but business insurance will cover financial losses from a variety of other entities, making it an essential part of your business plan.

Knowing the difference between being bonded and insured as a business owner will ensure you have the right policies to protect you on all fronts. If you’re unsure where your business’s vulnerabilities stand before and after being bonded, contact your trusted insurance agent. At TJ Woods Insurance, our agents can explain surety bonds and help match you with the most appropriate business insurance policy for your needs. If you’re looking for comprehensive protection, contact us today.