If you’re a policyholder for insurance, then it’s important to understand every aspect of your insurance policy. For example, if you’re taking out an insurance policy for your business, knowing the difference between being bonded and being insured is important. Learn more about these key terms and how they differ below.
What does it mean to be bonded?
Let’s start by defining what it means to be bonded. A bonded business is one that has bought a surety bond. A surety bond is a type of agreement between three parties known as the principal, the obligee, and the surety. We explain each of these terms below:
The principal
The principal is the person or entity who purchased the bond, i.e. the company that will be providing the service to the others
The obligee
The obligee is the party that requires the bond in order for the principal to be able to do business, e.g. a municipal or provincial government or institution
The surety
The surety is the insurance company that issues the bond to the principal. The purpose of a surety bond is to protect the third party that is hiring a business from the risk of a loss. The types of losses that a surety bond protects against range from theft or incomplete work to property damage and other failures of the hired company or entity. If a loss occurred, the third party would be able to file a business insurance claim and receive compensation for these losses from the surety. In turn, the cost of the losses would have to be repaid by the principal.
Types of surety bonds
There are two main types of surety bonds: contract bonds and commercial bonds. Knowing the difference between them can help you decide what type of surety bond is right for you:
Commercial bonds
Commercial bonds are a type of bond that a business is required to purchase if they want to work on projects with a government or municipal institution. They are designed to protect public institutions from losses due to a bonded business’ inability or refusal to adhere to relevant laws, regulations, or rules. If something goes wrong and the parties involved are unable to independently resolve the issue, the surety provider will pay the claim on the bond, but the principal will then have to repay this amount to the surety company. A few of the most common types of commercial bonds include court bonds, probate or fiduciary bonds, and licence and permit bonds.
Contract bonds
Meanwhile, a contract bond, which might also be referred to as a construction surety bond, is another type of bond that is purchased by businesses for financial protection. While contract bonds are most commonly used in the construction industry, they are relevant to other industries, too. That is why you will find multiple types of contract bonds, such as performance bonds, payment bonds, maintenance bonds, supply bonds, bid bonds, and ancillary bonds.
What does it mean to be insured?
Now that you know a little bit more about what it means to be bonded, let’s explore what it means to be insured.
Insurance is a type of financial protection that a business or individual can purchase from an insurance company. When you purchase a policy from an insurance company, you will need to sign an insurance contract agreement. Within this agreement will be a clear outline of the coverage that you are entitled to, whether that be car insurance coverage or general liability insurance for your business.
The insurance policy will also state the policy deductibles that you chose, as well as the policy limit. In essence, all responsibilities and obligations between the insurer and the insured will be outlined in the contract agreement.
The main reason that anyone purchases insurance is for the financial protection it offers. Depending on the terms of your policy, you can receive an insurance reimbursement for all kinds of damage and losses. For example, if you are purchasing a commercial insurance policy that includes general liability insurance, then you can be reimbursed for the cost of legal and court fees if a claim is filed against you.
Insurance coverage for businesses
There are many types of commercial insurance coverage available to policyholders in Canada. Continue reading for a breakdown of some of the most popular types:
Commercial general liability insurance
Commercial general liability insurance, also known as slip and fall insurance, is a type of liability insurance that can protect businesses against third-party claims. Specifically, CGL insurance can help pay for the cost of a lawsuit if a claim of bodily injury or property damage is made against your business. The costs that general liability insurance can pay include medical fees, repair bills, and legal fees, including defence and settlement fees.
Professional liability insurance
Professional liability insurance, which you may know as errors and omissions insurance, is another type of liability insurance that many businesses choose to add to their policies. This type of coverage can pay for liability claims that arise from unsatisfactory work, failure to deliver a service as promised, and negligence claims.
Product liability insurance
Product liability insurance is an extension of commercial general liability insurance, and it’s important for any business that sells products. Whether you sell food, beverages, clothing, sporting equipment, electronics, or toys, product liability insurance can protect you if a claim is filed against your business. More specifically, if a lawsuit is filed against you alleging that one of your products caused bodily harm or property damage, your insurance company will help cover the costs.
Cyber liability insurance
Cyber liability insurance is made for any business that has an online presence. Whether your business has a website or stores client information online, cyber liability insurance is important. Otherwise, you won’t be covered in the event of a data breach or cyberattack. This type of coverage can pay for the cost of an online attack or hack. Types of expenses it can pay include legal fees in the event of a lawsuit, as well as client notification, credit monitoring, and more.
Commercial property insurance
Commercial property insurance is for any Canadian business with a physical location. For example, if you have an office or a storefront, then this type of insurance is a must. Commercial property insurance is a type of property damage coverage that you can pay to repair your office, warehouse, or store if it is damaged due to an insured peril. For example, if a fire broke out in your office or a thief smashed a window while breaking into your store, you could file an insurance claim under the commercial property portion of your policy. Read the terms and conditions of your coverage carefully to find out exactly what risks are covered.
Business interruption insurance
Business interruption insurance can cover various expenses if your business is forced to shut down temporarily. For example, if a fire damages your retail store, you might have to cease operations until it is repaired. During this time, your insurance company could help pay for the costs associated with running your business, such as a portion of employee wages or property rent.
Crime insurance
Next, crime insurance is another type of business insurance coverage that many policyholders choose to add to their policies. With this type of coverage, your insurance company can reimburse you if your business falls victim to a crime, such as theft or a customer paying for a product or service with a fake credit card or fraudulent cheque.
Commercial auto insurance
Commercial auto insurance is one last type of business insurance that you might wish to add to your policy. If you already have a personal car insurance policy, you might wonder if you need to buy a commercial one.
The reality is that you will need extra coverage to insure a vehicle that is used for business purposes. Whether you want to make a change to your car insurance policy or buy a separate commercial insurance policy is up to you.
If this is your first car insurance policy for your business, then there are a few things you should know. First, if your business uses more than one vehicle, then you will need to purchase fleet insurance. From there, the coverage that you will need to add to your policy depends on the province that you operate in. Each Canadian province has its own car insurance regulations that you must comply with.
For instance, in Ontario, all auto insurance policies, including commercial auto insurance policies, must contain third-party liability coverage, accident benefits coverage, uninsured automobile coverage, and direct compensation coverage. To find out what types of coverage are required where you live and, therefore, what coverages you need to add to your auto insurance plan, reach out to BrokerLink today.
At the end of the day, we want to emphasize that personal auto insurance plans do not cover business use. They only cover personal use. This means that if you drive a car - no matter if it’s a sedan, truck, or van - and you use it for business purposes, such as delivering products to customers, travelling to clients’ homes, or transferring materials from one site to another, you will need to purchase commercial auto insurance for your business.
Bonded vs. insured: breaking down the key differences
To make sure that you understand how being bonded differs from being insured, we will now compare them side by side to distinguish them from one another.
Although bonds and insurance are frequently confused for each other, they are not the same. Thus, being bonded does not equal being insured and vice versa.
The main thing that being bonded and insured have in common is that they both offer financial compensation if a claim is filed. However, the similarities end there, as insurance is designed to protect the business from losses, whereas bonds are designed to protect a client or customer who has hired a business for a job from losses. Bonds act as a guarantee that a company will fulfill the terms of the agreement or contract.
With a surety bond, if a loss occurs, the claim would be made against the surety company that issued the bond. In contrast, with an insurance policy, the claim is made against the policy that was issued by the insurance company. In addition, with a surety bond, the principal is required to reimburse the surety company for the amount paid. This does not happen with a regular insurance claim.
We highlight a few additional differences between being bonded and insured below:
Financial protection
Surety bonds provide financial protection to the client or customer who has hired a company for a project or job. Meanwhile, insurance provides financial protection to the policy, e.g. the business or individual.
Claims
If a loss occurs and a claim needs to be filed, the claim would be filed against the surety company if a surety has been purchased. In contrast, an insurance policyholder would file a claim directly with their insurance company, which would either be approved or denied by the company. When an insurance claim is filed, the insurance company typically assigns an insurance adjuster to the case who carries out an independent investigation. They then make a recommendation to the insurance company on whether the claim should be approved or denied and how much money should be paid out to the policyholder if applicable.
Repayment terms
If there is a surety bond involved in the claim, the surety company initially issues the payout. However, the bond principal is then required to repay this money to the surety company. For an insurance policy, the policyholder simply receives the payout from the insurance company if their claim is approved, and they are under no obligation to pay it back.
Number of parties involved
Lastly, there are three parties involved with a surety bond - the principal, the obligee, and the surety company. However, there are only two parties involved with an insurance contract - the insurance company and the policyholder.
The benefits of being insured and bonded
If you still aren’t sure whether you want to be insured and bonded, keep reading to discover a few of the top benefits of both:
Bonds and insurance can protect your business from financial losses
First and foremost, bonds and insurance are both designed to protect businesses from financial losses. No matter the size or industry of your business, purchasing a surety bond or an insurance policy can limit your risk as a company. When you have this financial protection, you won’t be on the hook for the cost of damages if something goes wrong that you are covered for. For instance, if a lawsuit is brought against you, your insurance company can pay the legal fees and any other associated costs. If you didn’t have this type of financial protection, the cost of one incident could be enough to bankrupt your business.
Bonds and insurance make your business look more legitimate
A second benefit of having your business bonded and insured is that it will make you look more legitimate and reputable. In turn, this can attract more clients and will help make your brand appear more trustworthy overall. It can also reassure your clients that your business is financially stable and that if something goes wrong, you have adequate coverage that will protect you.
Bonds and insurance might be required by certain clients
Finally, surety bonds or an insurance contract might be required by certain clients. Thus, a client may not be willing to work with you or hire you for a project unless you can show proof of a bond or insurance policy. At a minimum, most customers require businesses to carry general liability insurance and will want to see proof of this before they sign a contract with you.
Does my business need to be bonded, insured, or both?
Although it’s not legally mandated in Canada, all businesses should have insurance. Specifically, they should have a basic business insurance policy that includes commercial general liability insurance, commercial property insurance, and professional liability insurance. However, on top of this, you may also need to purchase additional insurance coverages or bonds. It really depends on what type of business you run, as well as other factors, including:
- The type of business you run
- Whether you have employees and the number of employees you have
- Whether you use a car or multiple vehicles for business purposes
- Whether your business handles sensitive online data
How much does it cost to become bonded and insured?
The cost of becoming bonded and insured varies greatly. The cost of a surety bond largely depends on the conditions of the contract that the bond is going to cover. For this reason, think of a surety bond like a loan. The way that the cost of a surety bond is calculated is far more similar to the way a loan is calculated than it is to an insurance policy. The primary factors that are used to determine how much you will pay for a surety bond are your business’s financials and your credit score.
Meanwhile, insurance companies use their own risk-calculation formulas to determine what your business insurance premium will be. These formulas typically take into account a wide variety of factors, such as:
- Your years of experience in the industry
- The size and location of your business
- The annual and projected gross revenue of your business
- The number of employees at your business
- Your personal insurance claims history
- The products or services offered by your business
- The coverages, limits, and deductibles you select for your commercial insurance policy
- Whether your business operates online, in-store, or both
To find out how much a business insurance policy will cost you, reach out to BrokerLink today. One of our licensed insurance advisors can offer you a free quote over the phone, online, or in person at one of our locations across Canada.
Get in touch with BrokerLink to learn more about the differences between being bonded and being insured
If you still have questions about what it means to be bonded and insured, reach out to BrokerLink today. One of our licensed insurance advisors can explain how being bonded and insured differ and can even help you find a policy that meets your needs. They can also explain other insurance terms, such as reinsurance and double insurance.
BrokerLink has an entire team of experienced commercial insurance experts ready to shop around for a policy that is not only affordable but contains the coverage your business requires.
Get in touch today to request your free business insurance quote from a BrokerLink insurance advisor.
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