Do I Need to be Bonded and Insured?

Governments require independent contractors and business owners in many industries to purchase a license or permit bond before they can become legally licensed to practice their trade. Federal, state, and local governments and their citizens are protected by these bonds if the business does not adhere to applicable laws and regulations. The US Small Business Administration defines being bonded as a signed document that protects the project owner.

If you plan to do business with the federal government on a product or service contract valued at $150,000 or greater, you will be required to obtain a surety bond either during the bidding period or as a condition of being awarded the contract. If your business has employees, you are required by federal law to have workers’ compensation, disability, and unemployment insurance, regardless of whether or not you are doing business with the government.

State and local government contracts vary in the maximum contract size to require a surety bond, but the rules are similar to bonding rules applied to obtain federal contracts. Private entities such as non-governmental organizations (NGOs) and corporations will usually require business contracting with them to be bonded, no matter the amount of the contract award. You will need insurance to do business directly with any type of government entity, whether federal, state, or local.

If you only plan to offer products or services to private consumers, your individual state and municipality will have their own requirements on whether you need to be bonded and insured. State and local regulations for business insurance vary in their requirements, depending on the type and size of your operation, where your business is located, and with whom you intend to engage in business transactions.

If you find that you are not legally required to be bonded and insured, obtaining a surety bond and insurance for your business or professional service is almost always recommended. Although claims paid by your surety company will need to be repaid by you, bonds can protect you from losing everything at once and prevent you from having to deposit large sums of cash in lieu of a bond. Regarding insurance, don’t fool yourself into thinking that your chosen business structure can prevent you from liability. Your protection is still limited, and personal and business assets can still be at great risk. In our increasingly litigious society, it is always a good idea to obtain business insurance, especially if you are working with banks.

NFP only uses top-rated bonding companies. Contact us today for all your surety bonding needs. Quotes are free, and we will point you in the right direction, to get your business running.

What Type of Surety Bond Should I Get?

Surety bonds for businesses generally fall into the category of either commercial or contract bonds. Our team can help you determine the type of bond you need, but we offer the below as an introduction.

Commercial bonds are almost always required to do business with a government entity, although contract bonds are usually required as well. Commercial bonds protect the government and segments of the public in the event of a loss suffered due to the bonded business (the principal) not following applicable laws, rules, or regulations. Permit and license bonds fall into this category.

The surety company will pay the claim on the bond when the principal is unable to resolve the issue themselves. The principle is then responsible for repayment to the surety company. It is in the best interests of the principle to resolve issues before a claim on the bond is made. Certain bond claim activity can result in the cancellation of bonds that are required for licensing and permits.

The second main type of surety bond for businesses is called a contract bond. Contract bonds are sometimes called "construction surety bonds” since these types of bonds are usually required in the construction industry. Contract bonds apply to other services and production industries as well though. Below are the four main types of contract surety bonds.

  1. Performance Bond – This is the type of bond that gives customers the assurance they need that your business’ work will be completed as agreed upon and per the terms and conditions of the work agreement.
  2. Payment Bond – This bond ensures that employees, subcontractors, and suppliers are protected against non-payment.
  3. Bid Bond – Bid bonds ensure that, if a business is awarded a contract, the successful bidder will, in fact, enter into the contract, make all required payments, and obtain any performance bond required.
  4. Ancillary Bond – Ancillary bonds ensure that requirements of the contract that are not directly performance-related are followed, such as worksite rules and regulations or that certain benchmarks in the project are met on time.

What Type of Business Insurance Should I Get?

Only a licensed insurance agent is qualified to advise you on the type of insurance your biz needs. Although NFP is a surety company, we are an insurance agency, as well. The main types of business insurance are General, Product, Professional Liability Insurance, Commercial Property Insurance, Home-based Business Insurance, and a Business Owner’s Policy. Which, if any, of these policies you need, will depend on a variety of factors, including from where and with whom you do business. We will discuss with you the specifics of your business activity and be able to recommend the most suitable policy or policies for your individual business.

How Much Do They Cost?

License and permits bonds are generally very affordable, as the needed bond amount is set by a government entity whose interest it is to encourage business. The costs of other types of surety bonds are impacted by a variety of factors, such as the scope of the coverage, how much coverage you need, the length of time you will need coverage, and your company’s overall financial profile. When underwriting your bond, sureties will consider the financial strength of your company and your current capacity to be successful in the contract. This will include looking at your business equity, debt, cash flow, and working capital, as well as an evaluation of your general character and history of performance.

Bonds generally cost a very small percentage of the total amount of coverage needed. Some are based entirely on the character and financial profile of your company, and others are based on a percentage of the full amount of the contract. Although cost and underwriting guidelines differ by company, most performance bonds, for instance, are generally ½% to 2% of the contract amount. This means that a construction contract totaling $500,000 would require a performance bond payment of just $2,500 – $10,000.

What Does Insured and Bonded Mean

We hope we answered the question. Contact NFP for all your bonding insurance needs. We are an insurance company that offers bonding services, as well as expertise in all lines of insurance. Contact us, and we will work diligently to properly bond you!