Insurance and Bonding for Small Businesses

Why do small businesses need to be insured and bonded?

Bonds and insurance are two ways for small businesses to protect against financial losses and manage risk. 

For most industries, the required bonds are called surety bonds. Surety bonds are three-party agreements where there is a principal, an obligee, and a surety:

  1. The principal is you or your small business. You purchase the surety bond.
  2. The obligee is whoever requires you to purchase the bond. The obligee could be the state or local government for your business's location. A client or customer of your business could also be the obligee.
  3. The surety is the company you purchase the surety bond from. It is usually either a specialized surety agency or an insurance company.

On the other hand, insurance is coverage from a company that protects you against specific claims and risks. Insurance policies are two-party agreements between your small business and the insurance company. This contract guarantees that if there are any claims against your business, your insurance company can cover a certain amount of that cost. 

"Bond Insurance"

Opening almost any business requires you to be bonded and insured. However, being bonded and insured is often confused with the phrase "bond insurance" or "bonding insurance." This phrase comes from the mistaken belief that you can purchase your bond and insurance together and that bonds are the same as insurance. Surety bonds are very similar to insurance and are a subset of insurance. Still, it is essential to differentiate the two. Surety bonds differ from bonds, and you should be aware of the differences, especially when you want to obtain the relevant licenses for your small business. 

The following sections will explain bonding vs. insurance and how you can be bonded and insured as a small business. 

What does it mean to be "bonded" for a small business?

You have a "bonded" small business when you have purchased a surety bond that lists your business as the principal. It's important to note that not all types of businesses require surety bonds. Typical businesses that require surety bonds include:

  • Various construction contracting businesses
  • Auto dealer businesses
  • Notaries
  • Freight brokers

As stated above, a surety bond is a three-party agreement between a principal, an obligee, and a surety. Surety bonds guarantee that a business will complete the work promised in a contract. They also provided financial protection to business customers should they be harmed by poor business practices. Suppose you run a contracting business and fail clean up after a job. In this case, a client can file a claim against your surety bond. The surety company would investigate the claim, and if it's valid, they will pay the client for damages up to the bond amount. The surety would then afterward seek repayment from you, the principal.

Your small business may need to get a surety bond due to one or more of the following reasons: 

  1. Meet the legal requirements to obtain a license allowing your business to operate.
  2. Protect your reputation if something goes wrong with your client and business.
  3. Show clients your business is trustworthy and can perform accordingly to the contract.

Primary industries that need surety bonds

Three primary industries require you to obtain surety bonds to open a business in that industry. Although a large variety of industries require surety bonds, these industries are the ones that most frequently require the bonds to obtain a license in that profession. 

Motor Vehicle Dealer Industry

The motor vehicle dealer industry involves businesses that sell, manufacture, distribute or dismantle new and used vehicles. 

Surety bonds in the motor vehicle industry are usually only required when obtaining a professional license. The most common one is the motor vehicle dealer bond or auto dealer bond. These surety bonds are typically required to obtain a motor vehicle dealer license. They guarantee the business will follow the laws regulating motor vehicle dealers. The state's motor vehicle department sets the bond amount. Different types of auto dealers may require different bonds. The bond requirement is set by the secretary of state. 

Construction Industry

In the construction industry, there are two main types of surety bonds. Contractor license bonds to help contractors get their professional license; and contractor bonds that help contractors bid on projects and satisfy legal requirements for won contracts. 

Contractor License Bonds

  • Various Contractor License Bond: A contractor license bond is required for contractors to obtain their state/county contractor license. This allows them to operate their business in the county or state where they obtain their license. The bond guarantees that contractors will follow local laws
  • Financially Responsible Officer (FRO) Bond: Florida, Illinois, and Kentucky require this bond. This bond guarantees that there will be a "financially responsible officer" in your business who holds the company responsible for engaging in lawful and ethical actions. 

Contractor bonds (generally only required for large projects) 

  • Performance bonds: A bond that provides compensation when a contractor fails to complete a job according to standards
  • Bid bonds: A bond that provides compensation when a contractor fails to uphold a bid
  • Payment bonds: A bond that provides compensation when a contractor fails to make payment to other parties involved in the project
  • Supply bonds: A bond that provides compensation if a supplier fails to produce materials needed for a job
  • Maintenance bonds: A bond that provides compensation if a contractor fails to maintain a project from detects
  • Subdivision bonds or improvement bond: A bond required for contractors working on government contracts related to subdivision projects (projects on divided plots of land with homes for sale)  

Transportation Industry

Since the transportation industry is so diverse, various types of surety bonds exist. Most of these bonds are required for your business to obtain a professional license. 

The freight broker bond (BMC-84) is a surety bond that guarantees that a freight broker business will fulfill all its contractual and legal obligations. All BMC-84 bonds have a required bond amount of $75,000. This is a required step in obtaining a freight broker license. 

The overweight and oversize permit bond is a surety bond that guarantees freight carriers above a specific size or weight comply with all regulations and pay for all damages caused to streets and highways. This bond is usually required when applying for an oversized load permit.

The driving school bond is a bond that guarantee driving schools provide driver education in a manner that complies with all local DMV requirements. For some states, the driving school surety bond guarantees a refund of the customers' tuition if the school closes before lessons begin. 

The household goods carrier bond (or passenger carrier or broker bond) is a surety bond for moving services, and group passenger transportation services (like ride-shares) will fulfill all contractual and legal obligations. 

How to get Surety Bonds for Small Businesses

Surety bonds are typically acquired through a licensed surety broker who can shop around for you to get the best prices. As a broker licensed in 50 states, SuretyNow is here to help. Our procedure is straightforward - our intake form takes 3 minutes. Typically, we respond to our clients with quotes within 30 minutes during work hours.

Need help with your surety bond?
Call 1 (888) 236-8589 to talk to one of our surety experts today.
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What does it mean to be "insured" for a small business?

To be "insured" for a small business means that you have purchased insurance. Insurance protects your small business from paying out of pocket if clients bring claims against you. You create an insurance policy with your insurance company, so if a client files a claim against you, the insurance company pays for damages instead of you. 

Common Small Business Insurance Policies

Below are the most common types of insurance you may need to obtain when you start your new business. This isn't an exhaustive list of the insurance you need. 

Business Owner's Policy

The business owner's policy is an insurance package that combines all typical coverage options. It simplifies buying because you can obtain most of your required insurance in one go. Most small business owners choose this option.

General Liability Insurance

General liability insurance protects your business and assets from lawsuits involving negligence, injury, property damage, slander, and other similar mistakes. 

Workers' Compensation Insurance

Workers' compensation insurance is required by most states when you apply for a professional license to operate your business in that state. This insurance helps to compensate employees of your business for work-related expenses caused by injuries or illnesses. This insurance pays for your employee's medical bills, rehabilitation, and lost wages if work-related circumstances cause injury or illness.

Professional Liability Insurance

Professional liability insurance exists to protect you and your business if you are negligent in the professional services you provide to a client, even though you did not make a mistake. 

Data Breach Insurance

Data break (or cyber) insurance covers expenses caused by technology-related risks like a data break or a cyber attack. If your business relies heavily on technological data to run, protecting your information with this insurance is vital.