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Having business insurance and bonds can help safeguard a small business.
A business insurance policy protects your business from financial losses after unexpected problemsand clients sometimes want to work only with companies that have business insurance. Depending on the industry you work in, you may also need to buy bonds before clients will hire you. For example, construction businesses typically purchase a bond before working with a client.
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What Does Insured Mean?
Insured simply means you have purchased business liability insurance. Small business insurance can help with everything from physical losses like a fire to lawsuits.
Lets look at the details of a general liability insurance policy, a popular small business policy:
- A general liability insurance policy can pay claims against your business relating to bodily injury and property damage
- It can help a small business remain financially stable if youre sued by a customer or other business
- It can also pay lawyer costs, court costs and legal judgments
Are you a small business owner? Clients might require that you have a business liability policy before doing business with you. You want to be able to tell your customers you are insured and ready to do business.
What Does Bonded Mean?
Bonded means that you have purchased a surety bond to protect your business against claims of shoddy, incomplete work, or allegations of theft and fraud. A surety bond has three parties:
- Principal, which is the business buying the bond
- Obligee, which is the client requesting the bond
- Surety, which is the company that underwrites the bond
Bonds cover claims of negligence in the workplace. For example, lets say a construction contractor buys a bond at the request of a client. If the work is shoddy and ultimately goes unfinished, the obligee could file a claim with the surety company for the cost of hiring another contractor to finish the project properly.
Types of Bonds
Here are three different types of common bonds:
- Janitorial bonds. A cleaning company will often carry this type of bond. It will pay clients if the work is unsatisfactory.
- Fidelity bonds. This bond helps an employer if there are financial losses caused by dishonest employees who commit fraud against the company. Its also called a first-party fidelity bond. A third-party fidelity bond is also available and can protect customers from the dishonest actions of a companys employees.
- Contractor or construction bonds. With construction or contractor bonds, the construction company agrees to comply with government regulations detailed in the building permit for the construction job.
Why You Want to Be Bonded and Insured
Having both insurance and a bond can give customers confidence that your business is legitimate and that they wont be left holding a large bill if you fail in your work. Plus, many large clients require business partners to have general liability insurance and bonds.
Without the right bonds you may not get business from certain people. And without insurance youll end up paying for liability claims and property damage out of your own pocket.
The Costs of Getting Bonded and Insured
Some bonds you pay with premiums. Other bonds are paid as a percentage of the coverage amount that you want. Fidelity bonds are paid this way and usually cost 0.5% to 1% of the coverage amount.
Surety bonds are calculated as a percentage of coverage but usually at a higher rate, as much as 15%. This percentage is paid as an annual premium.
The Small Business Administration will often guarantee surety bonds in an effort to help small businesses compete for work. So check with the Small Business Administration when taking out a surety bond.
If you have employees, youll also want to have workers compensation insurance. This insurance pays the medical bills and lost wages for employees who get sick or injured as a direct result of their jobs. It is required by law in many states.
You may also need errors and omissions (E&O) insurance, which comes to the rescue if you make mistakes in your professional services. E&O insurance is also known as professional liability insurance and it will cover the cost of a client or customer who makes a claim against your business.