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What Does It Mean to Be ‘Bonded’?

The phrase “licensed, bonded and insured” appears frequently in business advertising—but what does it mean? While most people know what business licenses and insurance are, the “bonded” part of the phrase isn’t so familiar.

In short, being bonded means that a business has purchased a surety bond.

Sometimes a bond is required for a business to begin operating, and sometimes owners purchase them independently. Surety bonds are a business’s way of reassuring customers that they stand behind their promises—and if they don’t, consumers will be protected. If a business breaks its promises to its customers and they suffer financial loss, the bond can provide reimbursement.

In more technical terms, a surety bond is an agreement between three parties:

  • the obligee that requires the purchase of the bond (usually a government entity)
  • the principal who purchases the bond
  • the surety company that backs the bond, providing a line of credit if the principal doesn’t fulfill the obligations of the bond

For example, motor vehicle dealers in California (principal) must purchase a surety bond when getting licensed. The California Department of Motor Vehicles (obligee) requires the bond purchase. The principal will purchase their bond through a surety company.

Bonds protect consumers from harmful and unethical business practices. For instance, a business owner who purchases a surety bond does not plan to use it. Here’s why: if a customer files a $3,000 claim against the owner’s $25,000 bond, and the claim is proven, then the surety company will pay the claim. However, the owner will need to reimburse the surety for the full $3,000 claim. It’s in the bond holder’s best interest to honor the terms of their bond so they don’t have to repay it.

How is being bonded different from being insured?

A surety bond is different from business insurance, and serves a different purpose. While insurance policies are in place to protect the policy holder, surety bonds protect the bond holder’s clientele. Insurance companies spread risk among a group of similar clients, while the principal assumes all risk when purchasing a surety bond. Insurance policy holders expect to use their policy at some point. However, surety bond principals prefer not to have any claims filed against their bond. Claims indicate that consumers have incurred financial loss as a result of unethical or improper business practices.

Insurance companies expect losses, whereas surety companies do not. For that reason, purchasing some bonds requires the principal to provide the surety company with information about their financial history as part of the underwriting process. Since surety companies want to pay out as few claims as possible, applicants’ records are thoroughly reviewed before writing a bond.

Who should be bonded?

There are a few categories different surety bonds fall under: license and permit bonds, commercial bonds, contract bonds and court bonds. A myriad of industries require the purchase of surety bonds for consumer protection, and a few business owners buy them by choice. If a bond purchase is necessary, the obligation will be included in the industry’s laws. Some of those industries include the following:

These bonds protect consumers if an industry professional conducts business unethically, breaks any laws or causes consumers to sustain financial loss. However, their first purpose is as reassurance to customers that business will be conducted in accordance with the law—and if it isn’t, the bond will provide protection.

For that reason, businesses that have no mandatory bond requirement sometimes get one anyway. For example, carpet cleaning, pest control and painting companies spend significant amounts of (often unsupervised) time in their clients’ homes. Some of these companies purchase business service bonds, which protect clients from employee theft. While business owners hope to never use their bonds, customers’ minds are set at ease by the safeguard.

Court bonds include judicial and fiduciary bonds. Judicial bonds, like appeal bonds, attempt to limit losses resulting from a court ruling. Fiduciary (or probate) bonds are required when the court appoints someone to manage an individual’s assets or act as a guardian or custodian.

Keep in mind that bond requirements vary by industry and area. Some counties mandate bonds that are not required by the state, and not all states have the same bonding laws for the same industries. Always check with your industry’s local governing agency and read applicable industry laws for your area.

How much does it cost to be bonded?

The cost of getting bonded varies depending on several factors: the type of bond, whether it’s credit-based or instant issue, the applicant’s financial history and the length of the bond’s term, to name a few. If the applicant is seeking an instant issue bond, no credit check will be required. Applicants will pay a standard rate for these bonds. Credit-based bonds, however, require underwriting.

Underwriting is the process of determining the bond’s risk and premium. SuretyBonds.com offers fast underwriting services, getting your bond to you in as little as one business day. If your credit is poor, don’t worry—applicants with bad credit can still get bonded! SuretyBonds.com sponsors a Bad Credit Bonding program offering financing to help applicants pay their premium.

Court bond costs are determined differently because of the higher risk associated with writing them. Appeal bond applicants, for instance, must post collateral worth 100-110% of the bond amount in order to be considered for bonding because appeals are not often won. Custodial and executor bond costs are situationally dependent, depending on the size of the estate and/or the legal requirements of the custodian in addition to the applicant’s financials.

Still need more information on bonding? Check out these great resources!