NFIB

Bonded or Insured: What's the Difference?
05/ 03/ 2004

by Jeffrey Moses

Do you know the difference between something that is bonded and something that is insured? The terms "bonded" and "insured" often are misunderstood. Both involve coverage for financial risk or loss, and in some instances there is little difference between the two. Still, it is important to know the difference when assessing your company's need to protect itself.

Bonding usually refers to a type of surety guarantee that a specific project, service or act will be financially covered if performance is not complete or satisfactory.

Examples would be projects or services involving construction, home health care, electrical contracting, real estate inspection, gardening services, delivery or moving services. Companies or individuals providing these services and others customarily secure a bond from a bonding company, assuring that if a customer's project is not completed or is not deemed to have been satisfactorily completed, the bonding company will reimburse the customer for financial loss.

Some occurrences covered by bonding include noncompletion of a contracted project or service, cost overruns, not meeting schedule, unsatisfactory quality of work, damage to a customer's property while a project is underway or injury to customer's personnel during work.

Some customers will not contract work out to companies or individuals that are not bonded. Large companies and government agencies usually require bonding for their contractors, and many service providers secure bonding for themselves to be eligible to compete for large projects. Often, even customers contracting relatively small jobs (such as home repair or gardening services) will not consider companies or individuals that are not bonded.

Bonding companies charge according to the type and financial extent of risk. Most bonding companies have packages for certain types of businesses and are competitive in pricing and coverage. Policies vary, however, and it's wise to shop among competing companies.

Many companies that provide bonds are insurance companies or insurance agencies. Some specialize in bonding, but that is not a guarantee that they are more experienced or offer better pricing than companies that provide both bonds and insurance.

Insurance usually refers to a specific amount of financial coverage for risk to a tangible item, such as a building, car, boat, airplane or shipment of goods. Certain types of insurance, such as errors and omissions (E&O), are more like bonds because they provide financial protection for acts performed or not performed, in contrast to protection for risks to an item.

When considering becoming bonded, talk with your bonding company, insurance agent or other financial advisers about any overlap of protection. There's no need to become bonded if you're already adequately covered by insurance. In some cases, it may be cost effective to reduce insurance coverage and become bonded, but decisions such as this can be made only after researching alternatives.

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