Understanding the Basics of Bonds: What Are Bonds and How Do They Work?

If your business regularly provides services to clients and customers, you must account for the possibility of something going wrong. Regardless of how dedicated you are to fulfilling your obligations and living up to your word, circumstances beyond your control may disrupt your plans or delay your operations. With this in mind, your loss control measures must extend beyond your financial interests to include coverage for those of your clients. Bonds can prove to be a potentially critical investment.

Are Bonds the Same as Insurance? 

Bonds generally fulfill a similar purpose as insurance, offsetting your potential future losses in exchange for an initial investment. However, while traditional insurance policies typically establish a term of coverage (e.g., 6 or 12 months), bonds are often purchased to financially protect a specific contract, job or project. Still, while there are differences, bonds are frequently referred to as bonds insurance, as they are typically purchased from insurance companies and can prove to be essential loss control measures.

What Types of Bonds Are There?

There are several types of bonds that your business may need to compare and consider to ensure optimal financial security and peace of mind. Consider the following commonly utilized loss control tools:

• Surety bonds—These bonds may come in many forms, such as contract, commercial, and performance bonds. They are generally intended to provide financial reassurance and peace of mind for clients and customers who have entrusted your business with delivering agreed-upon services.

Surety bonds typically establish an agreement between the following parties:

• The principal, such as your business, purchases surety bonds according to the desires of the obligee.
• The obligee, such as your client, determines if surety bonds are necessary to secure their financial interests.
• The surety, such as your insurance company, underwrites and maintains the bonds.

Should the principal renege on their contractual obligations, surety bonds provide the obligee with the means to recoup their losses. The surety may then seek compensation from the principal.

• Fidelity bonds—These bonds, also known as honesty bonds, may often be essential if your business handles clients’ belongings or otherwise has access to their property. Fidelity bonds can provide a safeguard from financial ramifications should your company’s employees, including contract workers, commit criminal, fraudulent or dishonest acts against other parties. This may include coverage for losses arising from the following:

• Theft
• Forgery
• Destruction of property
• Burglary
• Illicit transfer of funds

We’re Here to Help

As a dedicated and trusted member of the Sacramento, California, community, California Liberty Insurance is well-positioned to assist your business. Our dedicated team will help you secure suitable bonds to protect your business’s financial interests and ease its clients’ concerns. Contact us today to learn more.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.