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It’s critical for your business to have ways of financially absorbing unfortunate circumstances to protect its growth and avoid catastrophic losses. Your insurance portfolio can help protect your company from many common incidents and perils, but at times it may also be necessary to ensure financial protection for others. After all, your clients and customers trust you to provide agreed-upon services and products, and failing to do so could have dire consequences for all parties. Fortunately, bonds can cast a crucial safety net across these potential incidents.
What Are Bonds?
Bonds are generally used to provide financial assurance to a party retaining services. In broad terms, you can think of bonds as promissory notes for a guaranteed service; if the service isn’t fulfilled to the terms of the agreement, the party who paid for the service will be compensated.
By purchasing bonds, you can guarantee your clients and customers will have the means of recouping financial losses for which you may be responsible. In many cases, bonds may be required for your organization to be eligible for various projects or jobs.
What Types of Bonds Are There?
Bonds come in many forms and the type appropriate for your organization and its clients may vary based on the type of work you conduct and your customers’ needs and preferences. Two of the most common types of bonds include the following:
In many cases, the obligee (e.g., a project owner or developer) may require the principal (e.g., a contractor or construction firm) to purchase bonds from the surety (e.g., an insurance company). If the principal fails to deliver on its obligations, the obligee can receive compensation via the bonds. The surety may then pursue repayment from the principal.
- Surety bonds—These bonds act as a form of financial security for parties entering into a contractual agreement and include the following three parties:
- The principal
- The obligee
- The surety
Does My Business Need to be Bonded?
- Fidelity bonds—These arrangements, also known as honesty bonds, can provide financial assistance if your business’s employees commit criminal or fraudulent acts that affect your clients. These bonds may help pay for losses arising from the following:
- Property damage
- Fraudulent trading
- Illicit transfer of funds
Your bond-related needs may vary depending on many factors, including the type of work you conduct, your business’s location and your clients’ requirements. Even when not required to do so, having adequate bonds can be a critical loss control measure, as failing to retain such financial protection could have devastating financial and reputational consequences. Even the most diligent and experienced businesses may eventually be responsible for their clients’ losses, and lacking the recourse to manage these situations effectively could lead to high out-of-pocket costs, damaged business relationships and limited future opportunities.
We’re Here to Help
At the Ed Weeren Insurance Agency, our dedicated staff is ready to help your organization understand, acquire and maintain the right bonds. We will work with you to ensure your finances and future are secure. Contact us today to get started.