What Is Bonded? (Licensed, Bonded & Insured Explained)

ByVladana Donevski
July 28,2022

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

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

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
  • Auctioneers
  • 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. 

FAQ
What does it mean to be licensed, bonded & insured?

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.

What are the types of bonds for business?

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.

How do surety bonds work?

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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This category of entities can make claims under the policy, even though it did not purchase it.  To reduce risk exposure, certificate holders will often ask policyholders to provide the details of additional insured parties, or request to be named as additional insured on the policyholders' document. In some cases, COIs offer “blanket insurance.” These terms provide all third-party partners (as defined by the terms of the insurance document) with coverage, negating the need to manually add additional insured entities. How Much Does a Certificate of Insurance Cost? In most cases, the COI cost is zero. Insurers typically offer it as a complimentary service. If insurance brokers attempt to charge your for COI issuance, you may want to go with a different provider. Be mindful that you may need to pay additional fees if you request policy changes to cover your new circumstances. As usual, the greater the coverage you have, the higher your premiums. How To Get A Certificate Of Insurance If you have a small-business insurance policy, how do you get a certificate of insurance? The answer is: Easily. Here are the steps you’ll need to take: Step 1: Contact Your Client If a client requests a COI, first ask them for their limits and minimums for the policy. You want to avoid sending over a COI that does not meet their requirements. If you need to increase your premium, write down your client’s name, address, and tax identification number. Your broker can use this in negotiations with your insurer to come to an acceptable price. Step 2: Call Your Broker The next step is to call your broker and familiarize them with the policy requirements. In some cases, your premium will already cover your partner’s limits and minimums, so your broker will contact your insurer to provide the COI. However, if it doesn't, the broker will ask your insurer for a quote on rider coverage for the length of the project. If the risk is high, you will have to pay an additional fee and take out a rider policy, which means extra paperwork. Step 3: Receive the COI The last step is to wait for the COI to arrive. Once you receive the printed certificate, you can send it to your client as proof of insurance and complete any pending negotiations or transactions before beginning work.  While the process is easy to understand, you need to start it early. Obtaining a COI from your broker can sometimes take several weeks. Types of COIs There are three types of COIs that cooperating companies can apply for, depending on the nature of the task in front of them, and the underlying insurance product concerned. Certificate Of Liability Insurance Liability lawsuit costs and settlements can run into the millions. Therefore, all participating businesses should have insurance that covers the risks they might face. Liability insurance protects the policyholder, certificate holder, and any additional insured. If you are requesting a COI from a third party, check that its insurance offers the right level of coverage and features, and whether additional insureds can be entities, too, not only individuals. Make sure the COI includes a description of the operations your potential partner is working on. You need to confirm that their insurer covers it adequately for the type of work it actually does. Lastly, check that coverage is primary and noncontributory. This means the policyholder’s policy will respond first in the event of a loss, even if there are multiple, overlapping policies all providing similar coverage, and don’t require you to contribute to the premium. Certificate of Auto Liability Insurance If you are working with a vendor that owns, operates, leases, or hires vehicles, you may want an auto COI. These confirm the partner company has sufficient coverage for your operational requirements. Certificate of Workers’ Compensation Insurance Lastly, you may require a certificate of workers’ compensation insurance, and you’ll need to check it’s written in line with the workers’ comp laws in your area. Workers’ compensation ensures that the policyholder has sufficient coverage to pay workers in the event of an injury. How To Check COI Compliance Companies check COI compliance via audits. The auditor must have a good understanding of endorsement terminology, insurance policies, contract requirements, and ACORD forms and standards. COI non-compliance can be extremely costly, because compensation can run into millions of dollars. Therefore, firms must ensure they are fully compliant before proceeding with work. COI Tracking For large companies and those that work with many firms, COI tracking is critical. Many projects require a paper trail comprising hundreds of COIs. In most cases, project managers don’t have the time to manage all those documents, so they use software instead. The benefits include: Managing changes in project scope, conditions, and coverage over time across multiple vendors Detecting coverage gaps that might increase the risk of liability Improving productivity by dedicating fewer staffers to COI administration Automating notifications of coverage lapses When Should You Ask for a Certificate of Insurance? You should always ask for a certificate of insurance if a vendor does work that increases your liability. If you work with a partner, you may still be liable for losses (such as the injury of a colleague), even if they don’t occur on your property. Always verify the COIs before asking the contractor to begin work. Don’t work with any entity that only provides verbal assurance, as this implies a misunderstanding of the terms and conditions of an insurance policy. Wrap Up So, what is a COI? The acronym stands for “certificate of insurance.” This is a mechanism businesses use to reduce their risk whenever they partner with a third-party entity. When you ask for a COI, you verify that your vendor’s insurance policy is sufficient to meet your standards for risk mitigation. And when you supply a COI, you reassure partners that you can cover any losses that occur as a result of your work.
By Danica Jovic · April 21,2022

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