The process of becoming bonded is relatively simple.
The first step is to find a bonding agency that will work with you. There are many different types of businesses that can help you become bonded, including: truckers, contractors and construction workers. If you are a driver or owner-operator, then you should contact a company that specializes in providing bonds for drivers.
The next step is to fill out the application and pay the fee for your bond. The amount will depend on what type of business you are in and what kind of job you do. For example, if you are an owner-operator or driver who transports hazardous materials, then your fee will be higher than someone who does not transport hazardous materials or goods. You should ask about the cost before applying for a bond so that there are no surprises later on down the road when it comes time to renew your bond or replace it if something happens (such as theft).
Once everything is taken care of (application filled out and fee paid), then all that remains is waiting for approval from your bonding agency! This can take anywhere from two weeks up to two months depending on how busy they are at any given time during the year.
How To Become Bonded
A small business can get bonded in one of two ways: a fidelity bond, which bonds against losses resulting from employees, or a surety bond, which bonds to give customers a guarantee of performance on contractual liabilities. These are specialty products and not traditional insurance policies, but you can obtain both types of bonds through insurance companies, as well as specialty bond companies. Small business bonds are sold through property and casualty insurance companies.
Some industry-specific bonds are offered via the U.S. Small Business Association. Consumers often seek a company with a surety bond as a first step in business legitimacy confidence.
Applying for a Bond
As a first step, call your insurance agent or a surety company and ask for a bond; be prepared to answer a lot of questions about the goal of the bond. Explain the type of bond needed and the amount of the bond desired. If you are unsure which type of bond you need, explain what your company is about so the agent can help you determine the right bond.
To apply for a bond, provide your company information. Complete an application that describes your business activity and provide a business or personal financial statement. Sign the application, and forward all supporting financial documentation so your application can go through underwriting before the bond is approved and issued.
Determining the Type of Bond
When deciding which type of bond you need, think about who you are trying to protect: your customer or yourself.
Surety bonds protect consumers. These bonds offer protection to consumers against mistakes a business might make. Many companies seek surety bonds in the event of an error or liability.
For example, when you hire a contractor, a common question is whether the contractor is licensed and bonded. If the contractor is bonded, he should have a surety bond that pays the consumer in the event of a loss. If a plumber was supposed to change a pipe but caused a flood damaging the kitchen cabinetry, the homeowner can make a claim on the bond.
Fidelity bonds protect business owners. A fidelity bond is used by a business owner who is concerned about employee issues, whether accidental or intentional. For example, banks, insurance companies and brokerage firms maintain fidelity bonds in the event that an employee steals money. The fidelity bond is your choice to protect you, the business owner, from people within your organization. Fidelity bond claims require substantial proof of cause.
How a Bond Works
While a bond is an insurance product, it isn’t an insurance policy. For example, a small surety bond covering a home contractor for $5,000 might cost as little as $50 annually. If there is a problem, the insurance company will pay the homeowner up to $5,000. The insurance company then requires the bond owner to repay the bond.
Because the insurance company expects to get repaid for loss, the application for the bond requires a personal or business financial statement. The insurance company will look at cash flow to ensure that the company has the resources to pay back the bond. The value to the customer is not having to take a business to court for damages. The insurance company paying the bond has the right to “subrogate,” meaning it can seek to recoup the amount it paid from the responsible party.
Difference Between Bond and Insurance
Insurance is more comprehensive than a bond. A bond is usually an inexpensive way to give a business credibility, demonstrating financial integrity. Insurance takes this a step further but is more expensive. Insurance policies might cover losses that both fidelity and surety bonds cover but to higher liability values. Insurance can also cover business property and customers’ property that is in the business’s care. You can even get coverage for mysterious disappearances with the right business insurance.
Ultimately, a bond issuer seeks remuneration if the bond is exercised. Insurance simply pays the claim and does not require the business owner to repay the loss. For example, if the contractor is sued for $50,000 in damages to a home, and the claim is approved or a lawsuit judgement obtained, the insurance company pays the damages. The contractor would not repay the $50,000 but might see insurance premiums increase.
