What Does Bonded Mean in 2025? Definition, Costs, and How It Works

Being bonded means a business has secured a surety bond, which is a legal agreement where a surety company takes responsibility for a debt or obligation that one business owes to another. This bond acts as a safety net, ensuring commitments are met and payments are made.

Key Insights

• A business is considered bonded when it purchases a surety bond.
• A surety bond guarantees that debts or obligations will be fulfilled.
• Unlike insurance policies, which involve two parties (insured and insurer), surety bonds involve three: the principal (business), obligee (party protected), and surety (bond issuer).
• The principal buys the bond to protect the obligee if the principal defaults on payments or fails to complete a project.
• Bonds can be acquired through agents, brokers, online marketplaces, or directly from surety companies.

Understanding Surety Bonds

A surety bond is a contractual promise where the surety company agrees to cover losses if the principal fails to meet their obligations. The obligee requires this bond as a form of financial protection, often as a prerequisite for licenses, contracts, or jobs.

For example, a construction company might obtain a payment bond to guarantee that subcontractors and suppliers will be paid. If the company fails to pay a subcontractor $20,000, the surety company covers this amount and then seeks reimbursement from the construction company.

Quick Fact

The principal is responsible for reimbursing the surety company for any claims paid out.

Bonded vs. Insured: What’s the Difference?

A business can be both bonded and insured. While both are forms of financial protection, bonds protect the obligee by ensuring the principal fulfills obligations, whereas insurance protects the policyholder against losses. Common insurance types include liability and workers’ compensation insurance.

Common Types of Business Bonds

• License and Permit Bonds: Required by government agencies before issuing certain licenses, such as auto dealership licenses.
• Construction Bonds: Include payment and bid bonds to protect project owners from contractor default.
• Court Bonds: Needed during litigation to guarantee payment if a judgment is overturned or appealed.

How to Obtain a Bond

Bonds can be purchased through insurance agents, brokers, online platforms, or directly from surety companies. Small businesses facing approval challenges can apply through the Small Business Administration’s Bond Program, which helps guarantee bonds.

Bonding Costs in 2024

The cost of being bonded varies based on bond type, credit score, financial health, and claims history. Typically, premiums range from 0.5% to 15% of the total bond amount.

Duration of Bonds

Bond terms differ; some last for a fixed period, others until contract completion, and some remain active until the obligee confirms the principal has met all obligations.

Surety vs. Guarantor

A surety guarantees performance of obligations, while a guarantor promises to pay a debt if the borrower defaults. For instance, a guarantor co-signing a loan agrees to repay if the primary borrower fails.

Filing a Claim Against a Bonded Contractor

Filing a claim is straightforward. Contact the surety company that issued the bond, request a claim form, and submit it along with evidence of the contractor’s failure. The surety will investigate and determine compensation eligibility.

Conclusion

Obtaining bonds and insurance is essential for many businesses to meet legal requirements, win contracts, and build trust with clients. Understanding the differences between bonds and insurance helps businesses make informed decisions to protect themselves and their customers.

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