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Bonded vs. Insured: What's the Difference?

Safety is an important factor in construction. But, it’s not just about physical safety. Insurance plays a big role in protecting the consumer and contractor—and so do surety bonds. Both are often the foundation of reliable contractors and appeal to consumers because they create a level of trust between the two.

Here’s a breakdown of what it means to be insured and bonded.

Insurance for Contractors

Liability insurance pays for damages if you’re held liable for bodily injury and/or property damage due to your premises and/or operations. It’s important to note that general liability does not pay for faulty work, only for damages that arise from the faulty work.

Insured contractors appeal to consumers because the consumer won’t be held responsible for damage or injuries that may occur on the job. As a result, consumer demand allows insured contractors to charge more than the uninsured for services.

Bonded Contractor

Surety bonds in contracting act somewhat as a promise between the contractor and both the consumer and public entity. For a consumer, License and Permit bonds guarantee a general contractor will do business compliant with the rules of his or her specific contractor license. They also protect the public from fraudulent practices and ensure a contractor is operating their business according to applicable codes and regulations.

A performance and payment bond is also often required for public work contracts (any job paid for in part or in whole out of public funds) due to the Miller Act. This Act requires contractors to provide performance and payment bonds that guarantee performance of contractual duties, and payment to subcontractors and suppliers that are involved in a bonded, public contract.

There are a number of bonds; here are five most common types:

  • Performance bonds favor the project owner and guarantee that all contract requirements are met. If the contractor fails to complete the required job, the bond can provide compensation to a project owner.
  • Bid bonds prequalify contractors to bid for jobs. They protect the project owner, ensuring the contractor will honor the bid requirements if awarded the job.
  • Payment bonds ensure all laborers working under the contractor (including suppliers and subcontractors) will be paid for labor and materials.
  • License and Permit bonds can favor either a homeowner or project owner guaranteeing a contractor does business compliant with the rules of his or her specific contractor license and protect the public from fraudulent practices thus ensuring a contractor is operating their business according to applicable codes and regulations.
  • Maintenance bonds offer protection in the event of faulty or defective materials, even after a project’s completion for a specified time period (similar to a warranty).

Requirements for bonding vary from state to state. The General Contractors License Guide is a good place to start if you need more information on state requirements.  

Insurance + Bonds

The most appealing contractors are often both bonded and insured. Insurance protects you in the event of an accident and allows you to operate legally. Bonds help create trust that you’ll complete the required project and allow you to work on public jobs.

Becoming a qualified insured and bonded contractor might feel like added work, but it will benefit you in the long run with the consumer. Bonds and insurance gives the consumer assurance that their interests are protected and confidence that they are working with a reliable professional.