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The term “licensed, bonded, and insured” gets used a lot in certain industries, especially those in which hiring contractors or subcontractors is a common practice.
Customers are often told to only work with businesses that satisfy all three requirements and many businesses focus on these terms in their advertising. But what does it actually mean? What are the advantages of getting licensed, bonded, and insured as a business? What do customers view as the main advantages of hiring companies that are licensed, bonded, and insured?
Let’s break down the individual terms and touch on some more advanced considerations that will help you understand what all of this actually means for your business and your clients.
What Does It Mean to Be Licensed?
Being licensed signifies that you have the necessary competence, meet a set of minimum requirements, and have the right to conduct business in your state. In some industries, construction, for example, there are certain tests that need to be passed before you can get licensed.
Generally, the more technically complicated the profession and the more likely it is to involve a greater risk of personal injury to clients, the more likely it is that testing will be required in addition to having to pay a licensing fee.
What Does It Mean to Be Bonded?
A bonded business is one that has purchased a surety bond. A surety bond represents an agreement between three parties:
The Principal – The principal is the purchaser of the bond; the company that will be providing its services to others.
The Obligee – The obligee is the party that requires the bond before permitting the principal to do business, usually a state or municipal institution.
The Surety – The surety is the insurance company that issues the bond.
Surety bonds protect the third-party that is hiring a business from any possible losses that would result from incomplete work, damage, theft, or other failures of the hired company. If damages do occur, the third party can file a claim and receive compensation for these losses from the surety, which would then have to be repaid by the principal.
What Type of Surety Bond Should You Get?
Generally, there are two types of surety bonds: contract bonds and commercial bonds.
Commercial bonds are required for businesses that want to work on projects with a government or municipal entity. They protect public institutions from losses potentially suffered due to the bonded business’ inability to properly follow applicable laws, rules, or regulations. The surety provider will pay the claim on the bond when the principal is unable to resolve the issue independently. The principal then has to repay the surety company.
The second main type of surety bond for businesses is called a contract bond. Contract bonds are also called “construction surety bonds” since these types of bonds are usually required in the construction industry. However, they apply to other industries as well.
The most common contract bonds are:
Performance Bond – This bond ensures that the business will carry out their services in full, in accordance with the agreement made between them and the hiring party.
Payment Bond – This bond ensures that employees, subcontractors, and suppliers are protected from non-payment or late payment.
Bid Bond – Bid bonds guarantee to the hiring party that the bidder will take on the job if selected.
Ancillary bonds – These bonds work in conjunction with performance bonds to ensure that all contract requirements are met, excluding performance and payment requirements.
What Does It Mean to Be Insured?
When a company is insured, it means that it has transferred any number of risks to a third party through an insurance product. There are many types of commercial insurance that can protect businesses from a variety of risks, but keep in mind that not every business needs every type of insurance.
In the context of a business claiming to be licensed, bonded, and insured, it usually means that the business has purchased some of the most traditional insurance policies that just about every business needs, such as workers comp and general liability insurance policies.
Contractors, and construction companies should strongly consider property insurance and builders risk polices.
What Additional Insurance Do You Need?
No business is exactly the same, so naturally, every business tends to have a different set of needs when it comes to coverage. The insurance your business should purchase will depend a lot on your industry, the size of your company, and various risk factors that may or may not be unique to your business.
The best course of action would be to consult expert brokers who understand your industry and can help you find the right coverage and the best value.
Embroker’s insurance professionals use industry-leading technology to benchmark your policies against similar companies in your vertical, then procure quotes from multiple insurance carriers for coverage you may not carry and might want to consider purchasing. We also cross-reference your costs with companies of comparable size, policy limits, claims history, and risk tolerance to make sure your premiums are as competitive as possible.
The Main Differences Between Insurance and Bonds
Bonds are frequently confused with insurance, but there are some major differences between the two. What they do have in common is that both provide forms of financial compensation in the event that a claim is made.
However, with a surety bond, the claim would be made against a surety company that issued the bond, but in the case of an insurance policy, the claim is made against that policy, which was issued by an insurance company. Additionally, you will be required to reimburse the surety for the amount paid on the claim.
The main difference is that insurance protects the business itself from losses while bonds protect the client that has hired the business for a specific job or project.
Why Your Business Should Become Licensed, Bonded, and Insured
Being licensed, bonded, and insured may not be required in every situation, but it can provide significant benefits regardless.
In addition to offering a sense of security to your clients, having a business license can actually protect you as well. In some states, it can help you collect damages when a client refuses to pay.
Being bonded helps create trust between your business and your clients because you are giving them assurances that they will be financially protected from losses they may suffer if you don’t fulfill your contractual obligations to them completely. Bonds also protect your reputation if you are unable to meet your client’s expectations.
Being insured offers reassurances to companies and clients that are interested in working with you and shows that you are financially stable. If something goes wrong, having the right insurance coverage will protect your business from financial loss and allow you to overcome a variety of challenges while dealing with these problems that might hinder your ability to provide your services to clients.
Clients and businesses want to work with companies that are secure, not with companies that could go bankrupt as the result of a liability lawsuit. Managing the risk involved in your business operations and transferring that risk to your insurers is an important aspect in securing the future of your business.
How Much Does It Cost to Become Licensed, Bonded, and Insured?
The cost of getting licensed will vary depending on your business’s location(s), your industry, and the type of operation your business is running.
The cost drivers for insurance will change based on the policies you choose, the unique risks your business faces, the value of your property, the size and revenue of your business, and other key factors.
The price of bonding will depend on the conditions of the agreement or contract that the bond is going to cover. Surety bonds are more similar to loans than insurance policies and the main factor that is taken into consideration when determining premiums is your company’s credit score and financials. Businesses that have a good credit score can expect to pay 1-5% of the bond amount but this can go up to 20% for companies with poor credit scores.
Now that you have a better understanding of what it means to be licensed, bonded and insured, you may be wondering how all of this affects your business and where to go from here.
The U.S. Small Business Administration can help your business apply for licenses and permits.
If you need more help or information on bonds and insurance, you can reach out to our team of expert brokers.
And if you’d prefer to get started on intelligent insurance quotes right away, create your Embroker account today.
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