What's the difference between contractor insurance and surety bonds?
- Contractor insurance protects your financial interest in your business.
- Surety bonds protect your clients and ensure you hold up your end of contractual agreements.
Both insurance and surety bonds play a critical role in the health of your construction business. Some are even required for you to obtain and keep your contractor license in good standing.
Let's explore the difference between contractor insurance and bonds and why you might want to have each in place.
Contractor Insurance
Numerous commercial insurance policies exist to protect your financial interest in your business, from your work trucks to your tools and equipment and more. Some contractor insurance policies, such as workers comp, may be required by law. Ultimately, contractor insurance provides a safety net against unexpected incidents that could affect your cash flow and profit margin.
Types of Contractor Insurance
Contractor general liability insurance: protects your business against the high price of claims and lawsuits for third-party injuries and property damage.
Commercial auto insurance: protects the hardworking vehicles your business uses or owns in the event of an accident, collision, or unexpected incident.
Commercial property insurance: coverage for your physical place of business and the tools and equipment that reside there.
Inland marine insurance: also known as tools and equipment insurance, covers the tools and equipment you transport from one location to another against loss, theft, and other damage.
Builders risk insurance: protects your financial interests in a project while it's under construction, including tools, equipment, materials, and completed work on the project site.
Workers compensation insurance: protects your employees in the event of a work-related illness or injury. In CA, contractors in many class codes are required to carry workers comp even if they have no employees; required by law for all businesses that hire employees.
Picture a neighbor nosily wandering through a job site at the end of the day and tripping over an extension cord, breaking his arm in the process. When he decides to go after you to pay for his medical bills, your contractor general liability policy will protect you from paying for his mistakes out of your profit margin.
Imagine securing a project site for the weekend and returning on Monday morning to find that vandals have broken in, stolen tools and materials, and damaged already completed work. A builders risk policy can help ensure you don't have to pay out of pocket to clean up the mess, repair damages, purchase new materials, and redo the work.
Consider your morning commute to a project site. If a distracted driver blows through a red light because they're texting while driving and smashes into your work truck, commercial auto insurance is there to help pay for repairs to your vehicle.
Think about how much you've invested in the tools and equipment you use to do your job. If those tools were stolen, contractor insurance could help ensure you don't have to pay out of pocket to replace them if you have the right policies in place.
A million different scenarios could cause you to dig deep into your pockets to pay for someone else's medical bills or property damage repairs or replace the equipment, tools, and vehicles you rely on.
Contractor insurance offers your business a safety net, so you don't have to worry about one small mistake or unforeseen incident.
Contractor Bonds
Contractor bonds are a legal agreement between you, your client, and an insurance or bond company that guarantees you will fulfill your contractual duties. If a problem occurs, the client can file a claim with the surety company, who will step in to ensure the contract is completed. Then, the surety company settles up with the contractor.
Types of Contractor Bonds
There are several different types of contractor bonds to cover multiple situations, including:
License bonds: required to obtain your contractor license in the state of California; this bond assures the State of CA that payments will be made if a contractor violates state license laws.
Performance bonds: guarantee a contractor will perform their work according to the conditions and requirements of the construction contract.
Bid bonds: guarantee that a contractor will complete the job as bid and will follow through on their commitment to complete the job they bid on.
Payment bonds: guarantee payment to subcontractors and suppliers, which protects the project owner against potential liens against the property.
Maintenance and warranty bonds: guarantee there will be no faults or defects for a certain length of time and that the contractor will take care of any repairs or replacements needed in that time frame.
Surety bonds are more common with government projects than on residential or commercial projects, but any project owner can require bonds for any private or public construction project.
If work is not completed, a supplier isn't paid, or a contractor goes missing halfway through a project, then the client can make a claim against the bond to the surety company. The surety company will investigate and then take action. They may hire a new contractor to finish the project or make payments to subcontractors and suppliers. After the claim has been satisfied, the surety company will then look to the contractor for repayment of losses or expenses.
Contractor Insurance vs. Contractor Bonds
Both contractor insurance and contractor surety bonds offer a certain level of protection as you conduct business. Contractor insurance is in place to protect you and your assets, equipment, and employees. Contractor bonds are in place to protect your clients and ensure you hold up to your contractual obligations. Both are a necessary part of doing business in the high-risk construction industry.