Bonds are a form of guarantee that responds based on performance and are quite different from traditional insurance. Unlike a liability or property insurance policy, a bond does not protect the buyer of the bond. The bond protects a third party, such as a governmental entity or an owner of a property under construction, from non-performance by the entity buying the bond.
What Types of Bonds Are There?
The main types of bonds are License & Permit Bonds and Contract Bonds. And there are a variety of bonds for special purposes, such as ERISA Bonds, which are required by fiduciaries of retirement plans. Crime coverage, also called Fidelity Bonds (Employee Dishonesty), is considered more of a traditional insurance product.
License & Permit Bonds
License and Permit Bonds are required by a municipality or regulator as a condition to granting a license or permit to engage in a specified service or activity. The bond typically guarantees that the party seeking the bond (called the obligor) will comply with applicable laws or regulations. For example, an injunction bond is used to guarantee payment to a defendant by a plaintiff if a court ends up finding for the defendant. Tax Bonds are used to guarantee payment of special taxes, such as sales tax related to alcohol sales.
eSpecialty Insurance provides License and Permit Bonds through its online portal.
Contractor Bonds are used in construction to provide a financial guarantee related to performance. There are different types, including:
Parties to Bonds
Bonds typically have multiple parties. The entity buying the bond (say a contractor) is the principal. The entity requiring the bond is the obligee. Lastly, there is the insurance (bonding) company issuing the bond and guaranteeing the principal’s obligation, which acts as the surety.
Sometimes there is a misconception about the coverage that a bond provides. Bonds do not protect the principal (say a contractor) from being sued. The provide a financial guarantee to the obligee, such as governmental entity or property owner, based on the principal’s performance.
Who Needs Bonds?
Some types of licensed businesses may be required to obtain bonds along with their licenses, such as:
License & Permit bond requirements vary by state.
In construction, the owner of a development will often require their general contractor to be bonded, and the owner or the general contractor may also require the sub-contractors to be bonded. Contract bonds protect the owner from financial loss from disruptions and failure to complete the project.
What Do Bonds Cost?
The cost of Bonds varies widely. An underwriter will consider the specific bond, and an organization’s size, location, industry, financial strength, claims history, and other factors to determine its likely exposures and the cost.
How to Get Bonds
eSpecialty Insurance is your specialty insurance expert. We have developed a streamlined process to provide multiple proposals from a range of competitive bonding companies for License and Permit Bonds.
Put our expertise to work as you balance comprehensive Specialty Insurance coverage and cost. Work with us!
Note: Insurance policies and bonds are not all the same. Some are more comprehensive than others, and some policies provide broader coverage in specific areas. In addition, each insured may have different exposures and coverage needs. We encourage you to read your policy and consult with a Specialty Insurance expert such as eSpecialty Insurance.