Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Business Insurance Bonding Basics

Business insurance bonding can be a lifeline to protect your business and reputation. It’s important to remember a bond is not an insurance policy. Rather, a bond is an investment used to finance a venture, business or project. It also acts to protect the buyer and the business owner.

In this three way agreement, the investor is betting on the success of the business. If a business is accused of property damage or personal injury, or is involved in an accident at work incident, a bond may be used to cover the legal expenses that may result from a claim.

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A bond is a certainty that, there being a business agreement between two parties, there will be no loss of funds for the third party (the client).

It is a guarantee that if, for any reason, the business arrangement cannot be fulfilled, the third party doesn’t have to concern themselves with not getting any monies returned. Sometimes referred to as a surety bond, business insurance bonding is a method for minimizing financial risk.

Bonds Protect

There is a fire at the office, worksite or warehouse. Yes, there will be insurance to cover expenses and replace lost property. Yes, there may also be a policy to keep employees from losing income.

But what about those contractually obligated projects that now cannot be fulfilled?

Regardless of how understanding or pleasant a third party, it would be difficult to amicably shrug off the loss. A client cannot, and should not, be expected to accept that the financial distress of a hired business partner will leave them in the same situation.

For example, if a hired contractor fails to finish work on a kitchen because he runs out of money to pay his employees, or because his equipment is stolen, a bond will protect the homeowner.

The result of allowing clients to suffer from a business’s financial woes could be bad word of mouth, the loss of future projects, or even breach of contract lawsuits.

Before engaging in a partnership, a third party may ask if the business is bonded. The smaller the company, the more likely this will happen. Being able to say ‘yes’ only strengthens the idea that it is safe to partner with you. Many states require certain businesses and contractors to carry business bond insurance. For more information visit the Surety and Fidelity Association of America.

About Business Insurance Bonding

There are different types bonds. Like most insurance, each has a parameter to cover specific situations.

  • Performance- This bond guarantees the work will be fulfilled under the terms of a contract.
  • Bid- A bid bond promises work if a bid is won by your business.
  • Indemnity- This bond ensures that if the business fails to fulfill the agreement, or the business fails to pay its debts, the loss incurred to third parties will be reimbursed.
  • Payment- This bond guarantees all subcontractors and material providers offering their services in the execution of a contract will receive payment.
  • License- This is a unique bond. Depending on the business, some states require it. As opposed to a bond, it is often paid directly to the state. It allows a company to easily qualify itself as a fully licensed business.

The premiums on any one of these bonds will vary, depending on the business and transactions engaged by the business.

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Bonding Programs

Insurance companies do offer bond insurance.

If the business is already partnered with a reliable insurance provider, that could be a good starting place for finding a bond provider.

It might be best to look at a few bond companies anyway. They specialize in the trade and can focus on your specific requirements.

Like finding an insurance provider, the search for a reputable bond company requires due diligence. They may offer all the surety bonding a business could need, but there should still be a comparison of premiums, options, benefits, dependability and customer service. The Small Business Administration offers more specifics on surety bonds at their website here.

Knowing the types of bonds available, take a look at the various bonding programs a provider offers. These are the four primary options:

  • Contract Surety: A Contract Surety Bond, sometimes called a Contract Performance Bond, covers a number of bonds listed in the previous section. It can include a maintenance bond. This guarantees that work will be free of defective workmanship or materials for a specified period of time. If the business works with a principality, there may be a subdivision bond. It ensures the business will fulfill obligation on improvements to streets, sidewalks and other public properties.
  • Basics About Business Insurance Bonding For AutosAuto Dealer: If the business uses any kind of vehicle, most states require Auto Dealer Bonds. It is also referred to as a used car dealer, MVD, auto dealer or DMV bond. This bond represents a promise to maintain their business vehicles as per the terms of the state in which they operate. This includes, but is not limited to, type of vehicle used, appropriate inspection and maintenance.
  • License and Permit: A License and Permit Bond lets third parties know a business has all the appropriate certifications. This means a business has done everything to protect consumers and has enacted on all the rules and regulations set forth by local, state and federal principalities. Differing according to state, there can be many commercial licenses and permits.
  • Bad Credit Surety: These are bonds for businesses with low credit scores, bankruptcies or limited experience in their industry. The premium will be dependent on the industry and the financial stability of the business. A less than sparkling financial history could be troublesome. But, like insurance companies, bond companies prefer to minimize their risk. The premium and interest rate might be a little higher.

Like coverage for business insurance, business insurance bonding is a necessity for many industries. What appears to be a single, simple mishap can ruin a reputable, or find a business owner sitting on the defendant’s side of a courtroom.

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