Bonded and Insured: What’s the Big Deal?
By Steve Kuykendall, Surety Manager, J.M. Wilson
A new homeowner looking to hire a professional for renovations will quickly be told by homeowner veterans to only hire a business that is “bonded and insured.” While this may just sound like contractor jargon, the two are different and both offer important forms of protection that allow all involved parties to rest easy.
What’s the difference?
Being a managing general agent that offers both bonds and insurance, our underwriters are often asked about the difference and if both are necessary. In short, the two offer protection to different individuals. Liability insurance will protect the business (or insured) from covered exposures while a bond protects the entity that is requiring the bond from the insured.
A surety bond is three-party agreement between:
- The obligee – entity protected by the bond
- The principal – entity promising performance
- The surety – the insurance company guaranteeing the principal’s performance
Surety bonds fall into five different classes that offer different coverage. The classes are:
- Contract Bonds – performance, payment, maintenance, and bid bonds.
- License & Permit bonds – required by federal, state, and local governments to guarantee the principal will uphold the law.
- Court Bonds – required in a court of law.
- Public Officials Bonds – for public employees holding certain offices.
- Miscellaneous Bonds – bonds that do not fit into the other bond categories
Liability insurance provides defense for the insured from claims in the event there are losses, lawsuits and damage.
Liability insurance coverage will vary depending on the profession and policy language. Coverage is widespread but usually can include:
- Bodily injury and property damage – covers physical harm (including sickness and disease) to a person or tangible property
- Medical expenses – coverage in the event a claim requires medical attention
- Product liability – includes legal claims for injury caused by dangerous or defective products
- Legal fees – often covers lawsuit and attorney fees
- Professional protection – includes errors and omissions and malpractice coverage
Do both have premiums?
Yes and no. Surety companies charge a premium, however the premium generally just covers the cost of underwriting and administrative fees to maintain the bond. Bond premiums are not designed to mitigate the cost of a bond claim but instead are a guarantee the principal fulfills its obligation (Yutzmerkle, 2012). In fact, bonds are underwritten based on the theory of expecting no losses. Unlike bonds, liability insurance assumes losses will happen and will always have premiums to cover the potential losses. Insurance premiums will vary and depend on the business and services provided.
Who needs what?
Liability insurance will always be a necessity for any entity. Having liability coverage tailored to their needs protects the insured from potential losses. Not all businesses need bonds however. Bonds are only necessary when the principal’s line of business requires a guarantee. Contractors, business owners, fiduciaries, and public officials are common professions who need bonding.
WRC Agency uses CNA Surety and CapSpecialty to meet the majority of your client’s bonding needs. However, other carriers are available for the harder to place risks. Contact the WRC Agency for the correct bond application needed.