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Business Bonding

Bonding Versus Being Insured

Bonding is very closely related to being insured. With insurance, an insurance company evaluates risk and estimates how much to charge for the policy and how to write the policy. Bonding is very similar in that the bonding company evaluates risk and determines how much to charge to provide bonding to a project.

Typically, when an undesired event occurs -- such as a homeowner's house burns to the ground -- the insurance company pays the homeowner for the cost to rebuild the house because he bought insurance from the company. Similarly, a bonding company typically pays a third party who is under contract with the purchaser of the bonding when something doesn't go right. In the event the bonded company fails to perform adequately, in some regard, the bonding company assumes certain obligations and responsibilities toward the client of the bonded company. The contract between the bonded company and the bonding company determines what obligations and payments are to be assumed by the bonding company. The contract also states the conditions under which these obligations are to be assumed. However, the terms "bonding" and "insurance" often overlap, and the semantics can be confusing.

For example, Errors and Omissions Insurance in the computer industry is much like bonding. If a company hires a programmer, and the programmer really screws up, costing the hiring company a great deal of money, Errors and Omissions Insurance will protect the hiring company. (I briefly discuss this in my book, Thinking Like An Entrepreneur.)

Projects Can Be Bonded

Just as a film project can be bonded, so too can construction projects and many repair projects. In both cases, there's a danger of misestimating the budget, cost overruns, and lack of completion of contractual obligations. If the repair or construction isn't completed adequately, the bonding company will make good in repaying the party hiring the construction or repair company.

Likewise, the government and many savvy consumers won't grant projects to companies who aren't bonded and insured. They demand this "insurance" protection. So, construction contractors who want the more lucrative and larger projects need to have the projects bonded. Or sometimes, the company itself will be bonded. In some industries, you can't legally practice without being properly licensed, bonded, and insured.

People Can Be Bonded Too

Here are a few examples of people who'd need to be bonded (including your line of work).

  • A freelance home inspector -- What if he misses something important that costs his client a great deal of money? Say he neglects to note that the new home is located on an ex-nuclear waste dump or that the floor is completely full of dry rot? These are expensive oversights! The inspector will want to get bonded.
  • Researchers -- For example, people researching chain of title or ownership claims on property. If such a research misses the true owner of a property, this could prove costly to the person who hired the researcher.
  • Inventory recorders -- If you're going to be doing inventory of valuables in someone's home, the homeowners might think you'll have a prime opportunity to pocket a few rare coins or gems. That represents a significant risk to a client hiring you. To ease their concerns, you'd want to get fidelity bonding or dishonesty bonding. Bonding is insurance to protect the client from this risk.

Bonding offers your client a degree of peace of mind and many clients won't hire people who aren't insured, bonded, or licensed. They'll ask you if you're insured and bonded. Further, the savvier and more thorough ones will check to see that you are, in fact, bonded by a company with the resources to make good on its guarantee.

Another danger you or your employees might face is being accused of taking something, even if you or they didn't. Or say the client sells his wife's valuable heirloom on the black market and blame you. It's possible bonding might protect you here. I'm not too familiar with the details of this kind of bonding, so you'll want to discuss scenarios such as this with your potential bonding company.

What to Discuss with a Bonding Company

As with any contract, the details of a contract with your bonding company can vary tremendously. For example, for a fidelity bond, does your contract say that the bonding company will pay only upon the accusations of theft or does it require a conviction for a criminal act? I believe fidelity bonding is relatively inexpensive. As with all bonding, price is evaluated on a case-by-case basis taking into consideration the risk your particular business represents.

Finally, I don't know if you're a one-person business or if you have employees, but be sure to discuss any differences between the bonding of employees and of yourself with your potential bonding company. And consider and discuss any issues of overlap between bonding and your current insurance. I'm not an attorney nor an insurance agent and am providing the above discussion as my understanding of bonding only. I suggest you research reputable bonding companies serving your industry and discuss your specific situation with them. continued

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