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How Is Being Bonded Different From Having Insurance?

It makes sense to always hire an insured contractor in case something goes wrong. Some companies advertise themselves as being bonded, insured or both. But to the average consumer, it’s not always clear what that means, or whether one is more important than the other.

There’s a difference between a company being “bonded” and being “insured,” and it’s an important distinction to make — not just for the individuals who hire these companies, but also for the companies themselves when looking for protection.

“You want them to have both, ideally,” says John Humphreys, a vice president specializing in bonding and business insurance for Eagan Insurance Agency in New Orleans. “It also makes you more legitimate to the client when you’re marketing yourself.”

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The main difference between liability insurance and surety bonds is which party gets financially restored, according to Alliance Marketing & Insurance Services, or AMIS. Surety bonds protect the financial interests of the consumer, whereas general liability bonds protect the company from having to pay a lawsuit out of pocket.

Insurance protects the business itself from losses, whereas bonds protect the person the company is working for.

“The bond basically guarantees that the required amount of money is set aside in whatever form the state requires to respond,” in case there is a loss, says David Golden, assistant vice president for commercial lines policy for the Property Casualty Insurers Association of America.

How to does a business get bonded?

To obtain a surety bond, a businesses needs to prove to a bonding company that it is trustworthy, and thus unlikely to steal from a customer. A surety bond would then guarantee that the business would have access to a certain amount of money in case the business’ customer files a claim.

So if a contractor accidentally breaks a window, the homeowner could file a claim against the contractor’s bonding company in order to be reimbursed.

“Since the contractor is the one with the policy, the claim would have to be paid to the contractor, who then would have to pay the client,” Humphreys explains.

Typically, the company needs to repay the bonding company.

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When a company says it is insured, on the other hand, the company is stating that it has liability insurance. That includes not just monetary, but any liability stated in the policy. The insured business does not have to pay back this amount.

“Insurance covers liability or whatever terms are in the policy, up to the limits stated in that policy,” says Stacey Pierce, assistant underwriter for AMIS.

Insurance would kick in if an employee were hurt on the job. So if a contractor’s employee falls off a ladder and gets injured while fixing a house, the employee would file a claim against the contractor’s insurance.

This benefits the homeowner, too, because if the contractor didn’t have insurance, the employee would file the claim against the homeowner’s insurance.

As for whether companies are required to be bonded or insured, it depends on what their state requires. For a company to obtain a license, some states require only a bond. Some require both a bond and insurance. And some require only insurance.

Of course, carrying bonding, insurance or both — in addition to being licensed — comes with a cost.

“As the contractor, obviously the cost of the job goes up if I have all three of those coverages,” Humphreys says.

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