"Bonds" are perhaps one of the most confusing types of insurance for any company. When a company claims that it is "bonded," it may not hold the kind of bond that matters to you. A “bond” does not always guarantee that the client will be protected as a result of having that bond. This is because there two basic types of bonds a business can purchase:
- Surety Bonds (broken into thousands of kinds, depending on the industry)
- Fidelity Bonds (business bonds, employee dishonesty bonds, and ERISA bonds)
Both Surety Bonds and Fidelity Bonds are a separate class of insurance. There are other kinds of bonds that are unrelated to insurance, such as bail bonds, or government bonds.
These two types of bonds exist to reimburse individuals or companies in the case of incomplete services or theft. However, between the two, Surety Bonds will protect a customer, while Fidelity Bonds are meant to protect a company. Therefore, when a company claims that it is "bonded," it's important to determine which type of bond it means.
A Surety Bond is often required by a licensing state or municipality. The business will purchase a bond amount (determined by the state), which the state will hold secure. If a business fails to meet its contractual agreements with a client or an employee of the business steals from the client, the bond money will be used to reimburse the client. The purpose of this is to ensure that a client does not need to haggle with an insurance company to receive compensation for incomplete work or stolen items.
Fidelity Bonds, however, are designed specifically to protect a company against their own employee’s or contractor’s actions. If an employee embezzles money, for example, an employee dishonesty bond would provide your company with compensation. The purpose of the Fidelity Bond is to ensure that your business has internal protections. These bonds do not benefit your clients or customers in any way.
Not every business will need both Surety Bonds and Fidelity Bonds. Similarly, not every business will need to purchase bond insurance at all. It's important to make sure whether bond insurance is required for your business, or whether it would prove to be beneficial. When doing business with another company that claims to be bonded, make sure that the type of bond they hold is a Surety Bond. Surety Bonds are the only type of bonds that will guarantee your will be reimbursed should a breach of contract occur.