What is a Bond?
As a business, you must account for many risks and exposures that may affect your daily operations, financial stability and future prospects. In some cases, these potential issues may also impact your customers and clients, and resulting lawsuits could incur significant financial ramifications. With this in mind, your organization should prioritize implementing and maintaining appropriate loss control measures, such as bonds, to help financially protect other parties with whom you conduct business.
What Are Bonds?
Bonds are loss control instruments that may provide financial security to parties involved in business agreements. In many cases, these products may be required for your organization to be eligible for a project or job. Even without such a mandate, bonds are recommended precautions, as they can offer financial protection and peace of mind for your clients.
Are Bonds and Insurance the Same?
Bonds are not the same thing as insurance. While both investments can provide financial protection, they are intended for different purposes and situations. Bonds are generally used to reassure parties involved in a specific job or contract to ensure that one business is not left with losses due to the shortcomings of another. Meanwhile, insurance policies are typically ongoing arrangements that provide broader coverage.
What Are Common Types of Bonds?
The bonds your business needs may vary significantly depending on your unique circumstances, including the services you provide and your clients’ needs and preferences. Two of the most common types of bonds retained by U.S. businesses include the following:
- Surety bonds provide financial security for parties that have entered into a contractual agreement with each other, such as those between you and your clients. These arrangements typically involve the following three parties:
- The principal (e.g., a contractor or business)
- The obligee (e.g., a client)
- The surety (e.g., an insurance company)
In most cases, the obligee determines if the principal must purchase surety bonds to provide financial security. If so, the principal must work with the surety to acquire the bonds. If the principal cannot deliver their promised goods or services, the obligee may file a claim against the surety bonds, after which the surety may pursue compensation from the principal.
Surety bonds may come in many subtypes, including performance bonds, court bonds and license and permit bonds.
- Fidelity bonds, also known as honesty bonds, are generally focused on providing financial protection for your clients if your employees, including contractors, commit criminal, fraudulent or dishonest acts, such as the following:
- Fraudulent transactions
- Property damage
We’re Here to Help
At First Priority Insurance, we understand the many risks and perils that your business may need to account for and are well-equipped to help you limit potential losses by securing appropriate bonds. Visit our website or call 678-369-6200 to get started today.
This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.