Should My SMB be Bonded?

By TE Cunningham

Small business owners are asked to wear many hats when managing their companies. Perhaps one of the most difficult is evaluating and deciding on the correct coverage for the business.

There is no question a company needs general liability insurance and likely other options such as property insurance, commercial auto insurance or workman’s comp insurance, which are all somewhat easily understood. Other options are tougher for business owners to wrap their heads around.

One of the least understood options is a business bond. What does it mean to be bonded, and why do you want your business to be bonded?

In simple terms, if business insurance is there to protect the business, bonding can be purchased for the protection of the business’s customer. A bond means that a customer can file a claim if something goes wrong in the delivery of service or with the work product. The bond purchased will cover the claim, provided that it has merit. The bond protects the customer from unethical or unfair business practices by the business.

Bonds come in two main categories – fidelity and surety.

A fidelity bond provides both the business and customer protection from theft, fraud or misconduct by the company employees.

TrustPoint Insurance Agent Bobbi Gellhaus, CISR, explains, “We understand a loss to a small business from employee theft or a fraudulent act could create a large impact on the business’s ability to continue operating. A fidelity or crime policy is always a good business investment anytime you have employees handling funds or with access to financial information.”

On the other hand, a surety bond guarantees that a service will be provided as it was agreed upon; this type of bond is sometimes referred to as a performance bond. This type of bond involves a) the principal, which is the company providing the services and the purchaser of the bond b) the obligee who is the individual or party protected by the bond and c) the surety, which is the issuer of the bond.

Gellhaus adds, “It is a common misconception that bonds are insurance, which is incorrect. 1) A bond is considered a financial backing for a business or an individual. 2) In the event of a bond claim involving failure to comply with the contract, inability to complete a project or errors related to the operations, the bond surety will step in to help resolve the claim situation, as applicable. 3) It’s important to note as part of the bond agreement, the bonded individual or company must acknowledge and pay back the cost of a claim to the surety company.”

Some businesses are required to be bonded by the state or municipality they do business in; businesses that spend a great deal of time in people’s homes should consider it – home services are frequent users of bonding.

Being bonded also forms a bond of trust with new clients. It provides a sense of professional legitimacy for the business – it says the business is ethical and credible.

If you don’t know if your business is a good candidate for being bonded, give your insurance agent a call and discuss it.

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