When most people think of a bond, their mind wanders to an investment vehicle that is relatively safe and generates a moderate return. For certain types of businesses, a different type of bond comes into play in a very real way. A bond is not an investment but instead a component of doing business that offers protection in one way or another. It is essentially a backup on a promise to perform work in-line with current regulations and standards. If you are a company that is curious about bonds and when and why they are needed, you’re in the right place.
Breaking Down Bond Types
In business, there are typically two different forms of bonds that may be required over time. First, a fidelity bond offers insurance against specific acts of employees. For instance, misconduct on the job, theft, or embezzlement which are actions not covered by a company’s general insurance fall under a fidelity bond. Businesses can determine if a fidelity bond works as blanket coverage for all employees, or as specific coverage for certain employees.
Fidelity bonds are less common than surety bonds. With a surety bond, a company may be required to have this type of insurance in place based on the work they perform. However, a surety bond does not work like conventional insurance; instead, a surety bond pays out money to an oblige, or the person or company who is benefiting from the work being completed. The surety agency issues a bond to a business to ultimately protect the customer, not the business performing the work. Surety bonds are a requirement of doing business in several fields, as detailed below.
When Bonds are Necessary
Both fidelity bonds and surety bonds may be an essential part of doing business when a company operates in a specific industry or line of work. Fidelity bonds, for instance, are most common among financial service companies and institutions, but they may also be in place for companies providing other services like cleaning or construction. In most cases, fidelity bonds are not a requirement for operating a legal business. Only companies that provide employee benefit plans that fall under ERISA must have fidelity bonds in place.
Fidelity bonds differ from surety bonds in that companies may be required by law to have a surety bond in place before a new contract is accepted. Construction contractors, HVAC contractors, freight brokers, and auto dealers are all examples of businesses that must have a surety bond. The amount of the surety bond required is mandated by each state, and it depends on the type of business in operation.
The Cost of a Bond
Fidelity bonds are far less expensive than surety bonds, but the total cost varies from company to company. This is because fidelity bond agencies evaluate the financial standing of the business or the individual owner to determine if they are a good candidate for a new bond at an affordable price. The riskier the business, the higher the cost of the fidelity bond.
Surety bond costs are determined in a similar fashion, but they often represent a higher expense to the business. The price for a surety bond is dependent on the credit history of the business owner, as well as other factors like previous bond claims history and track record of job completion. TO ensure the best cost for a surety bond, it is essential for companies to work with a strong surety agency that understands the need for the bond, the history of the business, and the financial background of the owner.
About the Author
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.