Should You Be Bonded?
 By Terry M. Blair

Every small business needs to be insured. Some small businesses can benefit from being bonded, as well. Generally, it depends on what your clients require and whether you perform contract work.

Although both types of protection are comforting, bonding gives you and your clients additional peace of mind. Bonding can also open opportunities otherwise denied to your company, such as government work, which often requires contractors to be bonded.

Liability insurance protects you if, for example, in the course of your work you damage your client’s property. You’re responsible for the damage. But if you’re insured, your insurance company will pay for it. If you’re not insured, your client may have insurance to meet the immediate expense. But, the client’s insurance company can be expected to sue you to recover its costs.

Another downside is that a claim against your insurance or your client’s insurance will probably increase premium rates. If you have insurance, your client has the peace of mind knowing that any damage will be paid for, and his own insurance rates will be unaffected. Your business probably won’t lose money since your insurance provider has agreed to cover your liability.

A surety bond works differently. If part way through a job for your client you decide not to finish the work, your client is left high and dry. But if your client required you to have a “performance” surety bond, the surety company is obligated to pay for the job to be finished by someone, even though you bugged out.

The mere fact you have a performance surety bond can be a great advantage when competing for jobs against companies that don’t. It’s a guarantee the work will get done. Often times a prime contractor will require subcontractors to obtain bonds to guarantee that their work will be completed, and to protect the contractor from the risk of not meeting the overall contractual obligation to the client.

Another type of surety bond, the “payment” bond, provides similar assurance that anyone supplying labor and materials will be paid. Payment bonds also often extend the right to subcontractors, laborers and suppliers to make a direct claim.

Surety bonds are commonplace in the construction industry. Generally their cost is built into bids for jobs. Cost can be substantial depending on the job, sometimes ranging from 1 percent to 3 percent of the overall risk. But costs vary greatly depending on the size of the job.

In a sense, bonding buys goodwill in the marketplace as much as protection. So businesses that have been bonded typically tout the fact as a marketing advantage. Some companies are bonded and also carry liability insurance. These added costs also mean they can charge clients top rates because of the double peace of mind they guarantee.

The U.S. Small Business Administration (SBA) offers contract bond guarantees that make surety bonds somewhat more available for contractors since the SBA assumes part of the risk. The three-party agreement between a surety company, the contractor and the client adds the SBA as a guarantor for the bond issued by the surety company. Find out more at www.sba.gov/osg.

Sole proprietorships, partnerships or corporate small businesses are eligible to participate in the SBA’s surety bond guarantee programs. The SBA also can help a contractor find an agent or a surety company by providing listings of those who participate in the bond guarantee programs.

Although bonding generally is associated with the construction industry, bonds also can be purchased as guarantees against harm and loss for companies in industries as diverse as pet sitters, maid services, nursing providers and auctioneers. Nonprofit as well as for-profit organizations also benefit from “fidelity” bonds that can be a relatively inexpensive safety net. Fidelity bonds indemnify an employer against loss of money or property through any fraudulent or dishonest acts by its employees.

(Posted September 2005)

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