Becoming A Bonded And Insured Contractor: Accounting Essentials

Being a bonded and insured contractor means that the contractor has secured money that is available to consumers in the event of a claim being filed against the company. This money is controlled by a bond, state, and is not under the company's control. For example, if you hire a house-cleaning company and an employee steals from you, you can file a claim and be compensated from the secured funds. A bonded contractor has also been properly investigated and found to be trustworthy. This status boosts their professional standing and credibility, making them more attractive to project owners. To become bonded, contractors must undergo a rigorous evaluation process, assessing their financial stability, experience, and overall reliability. They must also pay a premium to a surety company, which acts as a guarantor and underwrites the bond.

Understanding the difference between being bonded and insured

Being bonded and being insured are two different ways of providing protection for your business and your clients. While both are important, they serve distinct purposes and offer different advantages. Here's a detailed look at the differences between being bonded and insured:

A bond, typically a surety bond, is a financial guarantee that ensures a business will fulfil its contractual obligations. In the context of construction projects, a bonded contractor assures project owners that they will complete the project as agreed upon. A surety bond usually involves three parties: the principal (the business purchasing the bond), the surety (the company issuing the bond), and the obligee (the client that requested the bond). If the business fails to meet its obligations, the obligee can make a claim, and the surety will pay the bond amount, which the principal must then reimburse.

Insurance policies, such as general liability and workers' compensation, provide protection for your business in the event of a claim. If something goes wrong, such as theft, property damage, or injury, the insurance company will pay the claim to help your business avoid financial losses. Unlike bonds, insurance policies do not require reimbursement for claims paid out.

Key Differences:

• Protection: Insurance offers broader protection than bonds, covering not only contractual obligations but also claims of injury or damage.
• Parties Involved: Surety bonds typically involve three parties, while insurance involves two parties: the policyholder and the insurance company.
• Financial Responsibility: With bonds, the principal (the business owner) is financially responsible for approved claims and must reimburse the surety. With insurance, the policyholder does not need to reimburse the insurance company for claims paid out.
• Purpose: Bonds primarily protect a third party, such as the client or public, from financial loss or damage due to non-compliance or wrongdoing. Insurance, on the other hand, protects the policyholder (the business or business owner).
• Reimbursement: With bonds, the objective is to avoid filing a claim. If a claim is made, the principal must reimburse the surety for the amount paid. With insurance, there is no expectation of reimbursement, and the insurance company covers the damages.

Benefits of Being Bonded and Insured:

• Peace of Mind: Both bonds and insurance provide peace of mind for business owners and clients. Knowing that financial protection is in place reduces uncertainty and builds trust.
• Credibility: Being bonded and insured enhances a business's credibility and reputation. It demonstrates financial stability and a commitment to fulfilling contractual obligations.
• Compliance: Bonds and insurance ensure compliance with legal requirements and industry regulations. Many contracts and projects require businesses to have the appropriate bonds and insurance in place.

In summary, while both bonding and insurance are important for businesses, they serve distinct purposes. Bonds primarily protect third parties from financial loss due to the business's non-compliance or wrongdoing, while insurance protects the business itself from financial losses due to various risks and liabilities.

How to get a surety bond

A surety bond is a financial guarantee that a contractor will fulfil their contractual obligations. It is a protective shield for project owners, assuring them that the contractor will complete the project as agreed.

• Determine if you need a surety bond: Contact your insurance agency to determine whether you need to be bonded. Not all industries and situations require an independent contractor to be bonded.
• Protect your reputation: Companies that issue surety bonds run criminal background checks on the applicant. If you have a criminal history, the bond could be denied or the price could increase.
• Keep financial records up to date: You may be asked by the surety to provide year-end financial statements for three or more years prior to the bond request.
• Contact your state's licensing department: Call your state's licensing and regulations department or your industry's professional board to verify bond requirements. If your profession requires a state license, you may already be bonded.
• Contact your insurance agent: Ask for a surety bond if your client contract requires one.
• Contact the Small Business Administration: If you are unable to obtain a bond locally, the U.S. Small Business Administration may be able to help. They offer a Surety Bond Guarantee Program that aids small businesses in fulfilling bond obligations.
• Find the right surety company: The specific process for getting a surety bond will vary based on the company you choose to work with. Contact a surety company that is licensed to sell bonds in your state and provide the necessary business and financial details to get a quote.
• Submit your application: Complete and submit your application, along with any additional documents requested by the surety company. Attention to detail and transparency are key in this step.
• Expect a background check: After submitting your application, your surety provider will conduct an extensive background and credit check. You may be denied a bond if you are deemed financially unstable.
• Receive and sign your bond: Once you pass the background check, you will receive your bond. Sign the contract, agreeing to reimburse the surety company for any claims made against the bond, and pay the premium.

By following these steps, independent contractors and small businesses can obtain a surety bond, boosting their credibility and protecting their customers.

The benefits of being insured and bonded

Being insured and bonded as a contractor comes with a host of benefits. Here are some key advantages:

Protection for Clients and Contractors

Contractors who are insured and bonded provide protection for their clients and themselves. In the event of accidents, damage, or other issues during a project, insurance covers claims of injury or damage, ensuring the client isn't held legally responsible. Additionally, bonding financially protects clients if the contractor doesn't finish the job or delivers substandard work.

Enhanced Credibility and Trustworthiness

Peace of Mind

Having insurance and bonding in place provides peace of mind for all involved parties. Clients can rest assured that they are protected financially, and contractors can focus on delivering quality work without worrying about potential financial losses due to unforeseen circumstances.

Compliance with Legal Requirements

In some cases, surety bonds and insurance are legally required. Certain projects, especially those related to government contracts, may mandate surety bonds. Liability insurance is often necessary for contractors organized as a Limited Liability Company (LLC). By obtaining the required bonding and insurance, contractors ensure they are compliant with legal obligations.

Risk Mitigation

Bonding and insurance help mitigate risks for both clients and contractors. Clients are protected from financial loss due to contractor default or subpar work, while contractors safeguard themselves from claims that could otherwise lead to significant financial strain. This risk mitigation promotes a more stable business environment.

Facilitation of Business Growth

By being insured and bonded, contractors enhance their reputation and credibility. This can lead to more business opportunities, as clients are more likely to trust and hire them. As a result, contractors can expand their client base and potentially grow their business.

The types of insurance policies small businesses need

Small businesses need insurance to protect their assets, revenue, and liabilities. The type of insurance a small business needs will depend on a variety of factors, such as the industry, trade, and type of business. The size and location of the business, as well as the business owner's appetite for risk, will also influence the insurance requirements.

Public Liability Insurance

Even home-based businesses should consider public liability insurance. It covers you and your employees for potential liabilities to third parties if your products or services cause bodily injury or property damage. For example, if a customer slips and falls in your shop and fractures their wrist, or if your employee accidentally damages a customer's furniture while carrying out renovations. Public liability insurance covers the cost of compensation as well as defence costs, which could amount to thousands of dollars.

Professional Indemnity Insurance

If your business involves providing a service or advice, then professional indemnity insurance is essential. It protects professionals against liability for damages and legal costs if a claim arises from an act, omission, or breach of duty in the course of your work. This type of insurance is applicable to many professions, including chiropractors, consultants, engineers, architects, real estate agents, and accountants. In some professions, it is mandatory to hold a professional indemnity policy to render your services.

Business Insurance

Business insurance usually comes as a package with different coverage options to choose from, including building, contents, theft, glass, and general property. It protects your business from material damage losses from unexpected events such as fire, storm, theft, and accidental damage. It can also cover loss or damage to portable and valuable possessions, including laptops and mobile phones.

Business Interruption Insurance

This type of insurance covers the financial impact of your business coming to a sudden halt due to insured events such as fire, storm, or theft. It provides cover for lost income and increased expenses resulting from the interruption to your business operations.

Management Liability Insurance

This type of insurance protects the company and its managers from the risks and exposures of running the business, including allegations and acts of misconduct and legislative breaches. It covers statutory fines and penalties, defamation, statutory breach of duty, OH&S issues, unfair dismissal, and sexual harassment. Management liability insurance also protects the business against losses arising from employee dishonesty, such as theft and fraud.

Cyber Liability Insurance

If your business has a website or stores sensitive customer information on its computers, you should consider cyber liability insurance. It protects your business in the event of a cyber attack or data breach, covering the costs of repairing the damage and the associated legal costs.

Tax Audit Insurance

With an increase in small businesses being subjected to random tax audits, tax audit insurance can provide protection by covering the expenses incurred during an audit, including professional fees from accountants, lawyers, and bookkeepers.

Other types of insurance that may be relevant to small businesses include workers' compensation insurance, motor vehicle third-party personal insurance, and personal accident, illness, and life insurance. It's important to assess your business's specific needs and consult with an insurance expert to ensure you have the right coverage in place.

How to become a bonded contractor

A bonded contractor is an independent contractor or company that has obtained a surety bond—a financial guarantee that ensures they fulfil their contractual obligations. This bond acts as a protective shield for project owners, assuring them that the contractor will complete the project as agreed upon.

There are several steps to becoming a bonded contractor. Firstly, you must determine the specific bond required by the client. In the context of construction projects, there are two main types of surety bonds: contract bonds and commercial bonds. Contract bonds guarantee that the work will be completed and that all related subcontractors, suppliers, and vendors will be paid. Commercial bonds ensure that a business complies with all relevant rules and regulations when completing their work.

Once you have determined the type of bond required, you will need to complete an application and submit it to a surety company. This application will include details such as the bond type, amount, and the location of your business. It is crucial to provide correct and transparent details in this application, as well as any additional requested documents, to ensure your application is not denied.

After submitting your application, expect a background and credit check to be run on you and any other contractors working with you. It is important to maintain a clean criminal record and demonstrate financial stability to pass this step.

If you are approved, you will be issued the bond and will need to pay the premium to the surety company. You will also need to sign an indemnity agreement, agreeing to reimburse the surety company for any claims made against the bond.

It is important to note that bonding requirements may vary depending on your location, so be sure to research the specific requirements for your municipality and state.

Frequently asked questions