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small business general liability insurance
Getting Bonded and Insured to Protect Your Business
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By: Arlette Measures
Guide to Getting Bonded and Insured

“Must be bonded and insured.” If you operate a business, you’re no doubt familiar with this phrase. For many entrepreneurs, it raises a number of questions: What is the difference between the two? Must I be both bonded and insured to operate my business? How much insurance do I need? This guide presents facts about surety bonds and business insurance, plus tips to
help you to make the right choice when looking for a provider.

What is a Surety Bond?

A surety bond is a type of business insurance that guarantees performance and completion of a contract. The Small Business Association (SBA) explains it this way: “An obligee (or business) seeks a principal (or contractor) to fulfill a contract. To insure the obligee a successful delivery, the principal buys a surety bond so the surety company becomes responsible for its obligations. If the principal defaults, the surety company can either find another principal to fulfill the contract or compensate the obligee’s financial losses. In other words, the surety assures a successful contract because it assumes all financial obligations if the principal does not deliver.”

There are three types of surety bonds:

A “bid bond” guarantees that a contract bidder, if awarded the contract, will enter the contract and supply the required payment and performance bonds.
The “payment bond” guarantees that subcontractors and suppliers will receive payment for work they perform under the contract. A “performance bond” guarantees that the contractor will perform the contract in accordance with its terms and conditions. (The term “final bond” is sometimes applied to “payment bond,” “performance bond” or both.)

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