What Does It Mean to Be ‘Bonded’?

You have likely heard the phrase that a business is licensed, bonded, and insured. While most people know what a business license and insurance means, many may not understand the term ‘bonded’.

A bonded business is a business that has purchased a Surety bond. A Surety bond protects the third-party that hires the bonded business against any possible losses that result from incomplete work, theft, damage, or any other obligations on the part of the business.

A Surety bond is an agreement between three parties: the Obligee, Principal, and Surety company. The Obligee is the entity (usually a government body) that requires the business to purchase the bond. The Principal is the business that purchases the bond, and the Surety company is the company that backs the bond by providing a line of credit should the bonded business or Principal fails to meet its obligations.

For example, the California Department of Motor Vehicles requires all motor vehicle dealers operating in California to purchase a Surety bond. So, if you are a motor vehicle dealer and buy a Surety bond, the California DMV is the Obligee, you are the Principal, and your bonding company is the Surety company.

The Difference Between Being Bonded and Being Insured

A Surety bond and business insurance are two different things that serve different purposes. While an insurance policy protects the insured business, a Surety bond protects the Principal’s or the bond holder’s clientele.

Insurance companies spread risk among a group of clients, whereas a bond holder assumes all risk when purchasing a bond. Ideally, insurance policy holders would want to use their policies at some point, whereas Surety bond holders would not want any claims to be filed against their bonds as the bond holder will be held financially responsible if the Surety is required to pay out on the claim.

An insurance company expects losses on the policies it issues, whereas a Surety company doesn’t expect losses. When you purchase a bond, the Surety company will require you to provide information about your company’s financial history as part of the underwriting process.

Types of Surety Bonds

There are four types of Surety bonds: commercial bonds, fidelity bonds, court bonds, and contract bonds. In some states, it is mandatory for businesses to buy commercial bonds before the state recognizes them as legal business entities. A fidelity bond protects the Principal against losses in case one of their employees acts unethically.

A judge may require a party in a civil proceeding to buy a court bond. A court bond will hold the bonded party liable if they fail to act in a manner prescribed by the court. A contract bond holds a party to a contract responsible if they fail to meet terms set by another party.

Bond requirements vary with industry and states. Two states may have different bonding laws for the same industry. Check with your industry’s local governing body before buying a Surety bond.

H.M. Vreeland is a team of subject matter experts regarding all things bonding. Our agents bring years of experience and expertise to the table. We can handle your California probate bonding needs. To discuss your needs, call our office at (415) 573-3592.