Does My Small Business Need To Be Bonded

You often read in advertisements the phrase “licensed, bonded, and insured.” This is particularly common with home services professionals, such as roofing contractors, siding contractors, electricians, etc. While most people understand what licensing and insurance is for, there is some confusion on what bonding does. While the two are similar, insurance and bonding serve two different purposes.

Insurance: Some degree of insurance is essential for all businesses. You need insurance to cover damage to company property, damage by company employees to other persons or property, and perhaps life insurance for company officers or key employees whose absence would be detrimental to business operations.

If your business deals directly with consumers, you should have insurance to cover you against damage to property or persons on the premises of a customer. For example, if you were a tree care/tree removal service, your customer will want to know that you are fully insured in case any limbs or branches fall in the wrong direction and crush a car or injure someone nearby.

This also means if you or one of your workers is injured while cutting up the tree on the customer’s property, your insurance will cover the loss rather than their homeowner insurance policy. This gives your customers greater peace of mind and the assurance that their insurance rates will not skyrocket if there is a mishap on their property.

Bonding: While the insurance covers damage to property and injuries to people, it does not give the customer assurance of quality work; this is where the bond comes in. A bond is a contract between three parties; the issuer, the principal and the obligee. In this scenario, the principal is the business/contractor (in this case the tree service) and the obligee is the customer/homeowner.

What the bond does is protect the obligation the contractor has to complete the work for the homeowner. This means the contractor is obliged to complete all the required work up to reasonable standards and within a reasonable timeframe (in accordance with their agreement). If the contractor fails to meet their obligation to the homeowner, the homeowner may recover losses through the bond.

Bonding is especially important if you, your employees or subcontractors have frequent interaction on the premises of others. Because there are many “shady” home service contractors out there, customers increasingly expect you to be bonded (and many states now require it) to perform work on their property.

Obtaining a bond can sometimes be difficult and you may need to shop around for the right type and the best rates to suit your specific business. To determine if you need a bond for your business, the best place to start is to speak with an independent insurance broker. Independent agents have access to several of the top insurers in your state without being captive to one particular carrier. This allows them to shop freely to find the best product to fit your circumstance.