What Is Bonded? (Licensed, Bonded & Insured Explained)
The phrase “licensed, bonded, and insured” is omnipresent in some industries. You’ll find it in the company's tagline, marketing media, and client contracts. Far from being just an advertisement strategy, being “licensed, bonded, and insured” carries a lot of meaning. And, for some companies, getting relevant licenses, insurance, and surety bonds is a legal requirement.
But, while being insured and licensed is standard practice for many companies, not many first-time business owners are familiar with the third term. So what does bonded mean?
For most customers, ensuring that the business or contractor they hire fulfills all legal requirements is essential - and a significant factor in their decision-making process. Let’s look at the different terms and why your company needs to be bonded, licensed, and insured.
Licensed, Bonded & Insured – Let’s Start With the Basics
The phrase “licensed, bonded & insured” has been conceptualized as a quick way to let clients, contractors, and suppliers know that a business meets all industry-specific legal requirements.
Each of the terms in this phrase carries a lot of meaning, and using it as part of your tagline is not something to be taken lightly. But what do the different terms mean? Let’s start with “licensed and insured.”
Licensed means that business owners, employees, and managers have the necessary competencies and skills to carry out niche-specific tasks efficiently and safely. These competencies are assessed through standardized tests and certifications that need to be acquired.
Licenses are industry-specific, and the more technical a business is, the more licenses it will require to protect clients, employees, and suppliers. In customers' eyes, a licensed company has taken all the necessary steps to protect the public’s health and safety and can guarantee high work standards.
Insured shows that your company has acquired the necessary insurance to cover consumers and the company itself in the case of losses, accidents, or injuries. If a business is advertised as licensed, it has purchased insurance covers such as general liability and workers' compensation.
- Pro tip - It’s helpful to acknowledge that each business is unique and, depending on the industry and niche you operate in, you will need to purchase different insurance policies. Because of the complexity of this step, partnering with small business insurance providers can help.
So, now that you are clear on what “insured” and “licensed” mean, let’s look at the third term: what does it mean when a company is bonded?
What Does Bonded Mean?
If your business is licensed and insured, you are now probably wondering whether it also needs to be bonded.
In business, “bonded” means that a company has purchased a surety bond. A surety bond is a financial instrument that allows a business to protect another party, such as a client or customer.
If the business fails to deliver the expected results, fails to comply with industry requirements, or doesn’t fulfill its obligation, the surety bond provides compensation to the customer.
Each surety bond provides a certain amount of coverage. The bond cost is a percentage of this amount, usually varying between 1-15%. If your business wishes to purchase a premium (bond amount or bond limit) of up to $20,000, you will need to pay between $200 and $3,000, depending on your bonds’ underwriting provider.
The amount you’ll need for your company - and the rates you’ll be able to secure - will depend on your industry, niche, application specifics, and credit health.
Surety Bond Definition
Now that you know what to expect from a surety bond let’s look at the technical definition of this financial product.
A surety bond is an agreement or contract between three parties: the surety, the principal, and the obligee. This legal document is designed to guarantee that the obligations of a business owner (or principal) are fulfilled. It transfers the risk from the business owner to a third party (the surety provider or the government).
While there are different types of bonds, a bonded company is always preferable to customers, who will receive compensation even if the business fails to meet its obligations.
How Do Bonds Work?
When a company purchases a surety bond, it becomes liable for any obligations that are not fulfilled and guarantees the client that they will be able to receive third-party compensation. But how do these contracts work?
Firstly, there are three parties involved in the agreement:
- The principal is a surety bond’s principal, the entity buying the bond. A principal might be a person or business.
- The obligee is the entity (person or business) that might need to be protected by the bond.
- The surety is the bond contract provider, which is paid by the principal and responsible for producing compensation to the obligee if the principal doesn’t meet obligations.
It’s worth noting that the principal will be required to reimburse any payment (penal sum) made by the surety.
Being Bonded vs. Insured: What Are the Differences?
Business bonding and insurance are commonly confused. After all, both protect a third party and the company itself. But some radical differences set them apart. Here are the main three to simplify these concepts:
- The number of parties involved - insurance policies are agreed upon by two main parties: the insured (the company or business owner) and the insurer (the insurance policy provider). On the other hand, surety bonds involve three parties, and each contract will need to be crafted depending on unique circumstances.
- Bonds serve a different purpose - the main difference between an insurance policy and a bond is that an insurance policy is designed to protect the policyholder. In contrast, the bond protects the third-party obligee, the bond holder’s client.
- Bonds need to be reimbursed by the bondholder - when an insurance claim is filed, the insurer covers the liability. In the case of surety bonds, the holder needs to refund the payments made.
Unpreventable accidents or injuries might lead to insurance claims filing. Oppositely, surety bonds claims might indicate that the holder has carried out improper business practices that have led to financial losses for their clientele. That is why companies purchasing surety bonds will want to avoid any claim that might affect their reputation.
What Companies Need To Be Bonded?
While surety bonds are not needed for all industries or businesses, some companies can’t start operating without this added layer of legal and financial protection. Just a few of the niches that require surety bonds are:
- Contractors and construction companies
- Health clubs
- Insurance brokers
- Travel agencies
- Janitorial services
- Auto dealers
- Medical equipment providers
- Notaries public
Purchasing a bond means that your clientele is protected in the case of unethical or improper business practices. Therefore, businesses operating in other industries - such as painting or plumbing companies - might provide consumer protection through a bond, representing a competitive advantage.
Types of Surety Bonds
While there is a range of bonds your business might need, most surety bonds fall into the following categories:
- Construction Bonds - construction bonds are explicitly designed to protect clients and contractors in the construction industry. Some of the most popular construction bonds are bid bonds, payment bonds, and performance bonds. They cover a client against failed obligations, missed payments, and performance shortfalls during the bidding process.
- Fidelity Bonds - fidelity bonds are designed to protect a business from employee misconduct or criminal acts, including dishonesty and theft.
- Commercial Bonds - commercial bonds include license, permit bonds, and bail bonds. Governmental and state agencies require the first to ensure that the business will carry out tasks per governmental regulations. The second is designed to help defendants leave jail during a criminal or civil case.
Surety bonds requirements vary from state to state and from one industry to another. Make sure to check the laws applicable in your area.
Cost of Getting Bonded
As we have seen above, the cost of getting a surety bond will be calculated as a percentage of the premium required. This percentage can vary but usually falls in the 1-15% bracket.
However, the cost of surety bonds is also influenced by many factors. These include:
- The type of bond - Some bonds, such as license and permit bonds, are straightforward and benefit from fixed prices. Others, such as fidelity and court bonds, can be more expensive and even require collaterals worth 100-110% of the bond amount.
- Underwriting requirements - if you are after an instant issue bond, you won’t need to undergo any credit check and pay a fixed rate. However, options such as credit-based bonds can give you access to better rates. Still, they involve underwriting (or the process of assessing the risk and premium of the bond) and are subject to your creditworthiness.
- Your financial history - most surety companies won’t want to run any risk when granting you a bond. In the case of credit-based bonds, they will review your financial history and offer you relevant terms. If the applicant has good credit, the bond’s cost will be 0.5-5% of the bond amount, but someone with poor credit might need to pay between 5% and 20% of the bond amount.
The length and specifics of the surety bond might also influence the contract’s price.
When a company is licensed, bonded, and insured, it has obtained relevant industry licenses. It also means it purchased general liability and workers compensation insurance and has bought a surety bond.
For a company, being bonded means that it can protect its clientele if some contract obligations aren’t met.
There are several types of bonds for businesses, grouped in three categories: commercial, construction, and fidelity bonds. Government and state requirements for surety bonds might change from one municipality to another.
Surety bonds are contracts between the surety, the principal, and the obligee. The bond provider will protect the obligee in case the principal does not fulfill its obligations.
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