Understanding insurance terms: Bonded and insured

Understanding insurance terms: Bonded and insured

Matt Crawford
By Matt Crawford
Nov 24, 2023
1 min read
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Editor’s Note: We’re on a mission to make it easier for you to understand business insurance so you can make an informed decision about the coverage you purchase. Check out our insurance glossary to cut the jargon.

As an entrepreneur, you may have come across the term “bonded and insured.” If you find yourself going wondering what those terms mean, you’re in good company.

We’re here to help. In this article, we’ll cover:

The difference between being bonded and being insured

When you say that you are licensed, bonded and insured, you have the required licensing for your business, proper insurance, and you have made payments for additional coverage with a bond.

A bond is like an added level of insurance on your coverage plan. It guarantees a payment amount if certain conditions are (or aren’t) met in a contract you’ve signed.

For example, let’s say you’re a contractor with general liability insurance. That’s a great first step. But you may need to have a contractor bond to cover additional types of damage that could occur on the job or claims against incomplete work or a shoddy job.

There are different types of bonds

There are many types of bonds on the market. Some of the more common ones for small business owners and self-employed workers include:

Surety bonds

If your first question is, “what’s a surety bond?” you’re not alone. A surety bond is general term for a contract between at least three parties that protects against losses caused by one party not meeting contractual obligations.

If you’re a construction business owner, then the surety bond would be between you, your customer and the surety (the person/organization who is issuing the bond). You pay the surety to take out the bond. If you fail to meet your contractual obligations to your customer, then the surety pays the fee or the fine to your customer.

In many cases, the Small Business Administration guarantees surety bonds to help small businesses compete for jobs. It’s worth checking if they would guarantee your surety bond.

License and permit bond

A license bond, also known as a permit bond, is a special type of surety bond.

License and permit bonds are required by federal, state, or municipal government agencies as part of the licensing process for your business. These bonds guarantee that your business will act according to all regulations and laws. Depending on your business needs, this bond can be valid for one year or even up to five years.

Contract bonds

Also known as “performance bonds,” a contract bond serves as a guarantee for the fulfillment of your contractual terms. Its purpose is to assure a standard of performance agreed upon by the contractor and the customer.

The parties in this bond can specify the expected time of completion, materials to be used on the project and a variety of other factors to meet the customer’s requirements.

It is issued either by a bank or an insurance company, and is generally purchased per project, by contractors, as part of the requirements for securing a job.

Among other things, it protects the customer from incomplete projects. This can include instances in which the contractor goes bankrupt before the project is complete.

Fidelity bonds

The word “fidelity” refers to loyalty and honesty. Despite its name, a fidelity bond protects policyholders from fraudulent acts committed by employees.

As a business owner, a fidelity bond would protect you against employee theft or any damages caused by an employee’s wrongful or criminal acts.

Cost to get bonded and insured

The cost of getting bonded and insured varies. It depends on your profession, the type of bond you’re taking out, the level of coverage you want, the deductibles, and where your business is operating.

Surety bonds are generally calculated as a percentage of your desired coverage amount, at a rate of up to 15%, with this percentage paid as an annual premium. So a $100,000 bond could cost up to $15,000 annually.

In some cases, like licensing bonds, your credit score may be taken into account when calculating the premium.

Contract bonds and fidelity bonds, are also typically paid as a percentage of the coverage, sometimes between 1-3% of the full coverage amount. For example, if you are looking for a $50,000 bond, you can expect to pay around $500 as a starting price.

Does my business need to be bonded?

This is an excellent question. For most professions, whether or not to get small business bonds is up to you.

However, it is a common requirement for construction businesses to have bond coverage, general liability insurance and workers’ compensation before being approved for a project or professional license. In some cases, it’s required by law.

If you’re doing smaller jobs like mowing lawns or cleaning houses, then you may not need to be bonded.

How NEXT helps small business

NEXT specializes in business insurance for small businesses and self-employed workers. We offer a painless and seamless online process for finding insurance for thousands of types of small businesses.

Start an instant quote today and answer a few questions to review options designed for your business with general liability, professional liability, commercial auto and workers’ compensation.

It takes about 10 minutes to purchase a policy and secure your digital certificate of insurance.

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Matt Crawford
About the author

Matt Crawford leads NEXT's content team. He's a small business insurance specialist and has worked with business owners throughout his career as a community journalist and content marketer.


You can find him at one of his many favorite local restaurants in the San Francisco Bay Area when he's not at work.

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