What are bonds?
Being bonded is different from being licensed, although the terms are sometimes related.While business insurance is coverage for the company, being bonded means that a business has bought protection for the customer/client. This is a type of specialized insurance policy that protects a client or customer from detrimental, unethical or generally poor business practices. The bond provides a stipulated amount of protection and if the business fails to complete a job as required or contracted, the bond would compensate a client for damages up to the bond limit.
A performance bond (AKA surety bond), provides a client with a guaranteed warranty that the services will be provided as agreed. There are three parties involved in the transaction of surety bonds:
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The Principal – The principal is the company that will be providing the services and the purchaser of the bond.
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The Obligee – The obligee is the party that requires the bond in order for the principal to do business, usually a state or municipality.
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The Surety – The surety is the insurance company that issues the bond.
Types of bonds
Permit/Licence
These bonds guarantee that a business owner or a “principle” clearly understands and follows the regulations outlined for their specific license. This is where the term “license & bonded” comes from. Examples of a license violation are misrepresentation or fraud.
Contractor License Bonds
These bonds are required in California and a lot of local municipalities have additional requirements of their own. Usually, they ensure compliance with relevant business codes and other regulations in the principles area of operations. They also provide protection to people who hire contractors for a job.
There are other types of bonds such as auto dealers,freight brokers bonds and bonds specific to other industries as well. As a rule of thumb,you will need to be bonded if your state or municipality requires it. Moreover, bonds serve as an additional layer of trust between you and the client because if a claim arises and the bond company pays out on your behalf. Not only will you be reminded of the promise to meet your ethical standard when you purchased the bond, in most cases you’ll have to reimburse the bond company along with any fees as well. Giving the client peace of mind that you act accordingly with the law and you provide services as products.