Licensed, Bonded and Insured

Licensed, bonded and insured is a phrase you see pretty often in advertising.  Licensing pretty much everyone understands.  In this state, like most others, many occupations have licensing requirements; in Washington State hundreds of occupations and professions from Accountants to X-Ray Technicians must be licensed and all licensing has some standard that must be met.  Insurance is also a pretty well understood concept.  We have it for our cars, our homes and various other areas in life we want to protect from financial risk so we know what it looks like; bonding, not so much.  Bonds are intended to be a form of guarantee and they protect the entity (person or organization) that requires the bond, not the purchaser.  The entity requiring the bond may be the state – in the case of an auto dealer surety bond – or a homeowner who hires a construction company in the case of a payment bond.  The bond is not insurance and a premium paid for a surety bond is actually a fee for the guarantee itself; it is not designed to cover potential losses.  What does the guarantee mean?  If a claim arises under a bond, the bonding company will pay against the claim and then recover the amount paid from the purchaser of the bond.  Therefore, purchasing a bond generally means assuring the bonding company of the good character and financial stability of the purchaser – they want to know the bond will be repaid.  And that is the benefit to you as a consumer; the assurance that the bondholder is willing and able to put their reputation and financial security behind their promise to do something. There are many bond types.  Auto dealer surety bonds are a form of occupational bond designed to guarantee to the state that an auto dealer will operate according to state laws and regulations.  A dealer who was sued for tampering with an odometer, for example, could find they have broken state law.  If there were a claim against their bond stemming from that, the bond issuer would pay the claim and recover the funds paid (up to the bond amount) from the bond purchaser.  Performance bonds of various kinds offer specific assurances about work to be performed:  construction or contract bonds are issued to protect the project owner by ensuring the fulfillment of a contract; maintenance or warranty bonds ensure a contractor will provide quality materials and workmanship and provides protection against defects in work for a project owner and site improvement bonds are often required by a government agency to protect public property from any losses associated with a private project. A site improvement bond offers assurance a developer will restore any public property damaged or changed during a project.  One form of bond of interest to the consumer is the payment bond which assures that labor and subcontractors will be paid. Bonds are sold under the assumption they will never be used, unlike insurance which assumes there is a level of risk that an event will occur.  That is why character, financial history and current financial history are so important in seeking and pricing bonds.  People with a history of defaulting on a bond payment are very unlikely to successfully purchase another bond.  In many cases, the bond issuer may even ask for collateral to assure the ability to repay.  Whether or not collateral is taken, privately owned companies will likely be required to provide the personal indemnity of the business owners as well as company indemnity. Rates for bonds are determined by the amount of the bond and through an assessment of an individual’s or business financial history, credit, and amount in liquid assets.  Insurance rates look backward to assess risk; bond premiums look forward to the ability to repay.  The reason for this is that bonding involves a guarantee of future performance and the bond issuer becomes the financial guarantor of that performance. Let one of our business insurance specialists discuss the importance of various insurance coverages and bonds for your business.  Call 888-433-0031 or visit the business insurance or bonds pages of the Homer Smith Insurance website at www.homersmith.com.

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