Why Liability Insurance Doesn't Reduce Your Need For Contractor Bonding

Running a contracting company, whether you're building commercial properties or offering custom design services, your job requires you to put a lot of your own money on the line as you start each job. Bonding is an essential cost that many contractors wish they could skip because they simply don't understand how it differs from the insurance they also carry. Understanding the differences between contractor bonding and liability insurance will help you justify both costs in operating your construction business.

Insurance Against Mistakes

Liability insurance is primarily designed to protect you from claims made against negligence or mistakes made by you or your employees. For example, a builder who forgets to install the right flashing around a window and causes a long term rot problem will likely use their insurance company to pay for the repairs when the homeowner discovers the problem. This kind of insurance is also essential for protecting the contracting company against injury claims. A construction work site is full of hazards to both strangers walking by and the homeowners living in and around the work, so insurance is essential for paying for medical bills and injury claims in case of an accident.

Bonding for Completion

While you pay for liability insurance on a monthly basis and apply it to all of your work, bonding is done on a job by job basis instead. This is a form of short-term loan in which you offer money to the surety bond holder to prove you're capable of finishing the project. If there's an issue that interrupts the work, the money held in the bond is used to complete any contractual agreements with subcontractors, suppliers, and other interests in the project. The homeowner may also get involved in the bond if they're left with a half-finished house after paying in full for the construction. A bond allows them to reclaim at least part of their money so they can use it to hire someone else to finish the work without getting involved in a lengthy lawsuit.

Protecting Different Interests

Insurance and bonding simply protect different parts of your business. Without liability insurance, you could lose everything due to a lawsuit after a falling board injures someone walking near your construction site. When you go without a surety bond, you could be sued by an electrician that doesn't get to complete the contracted work or a supplier who doesn't receive their full invoice due to financing problems. Bonding is especially essential for large contractor projects in which you're financing all or most of the project upfront in exchange for future reimbursement, such as a custom home development project that will only sell after the homes after finished.

Licensing Requirements

Most states also require you to carry at least one, but most likely both, types of financial protection in order to become a licensed contractor. Dropping your bonding or your insurance will cause your contractor's license to lapse, leading to far worse financial consequences in the forms of fees and penalties for operating without proper licensing. You're also opening yourself up to lawsuits from clients who are hiring you under the pretense of your company being licensed, bonded, and insured.

Marketing Your Services

Carrying both insurance and bonding is a major selling point, even if your clients don't always understand the subtle differences between the two. Adding both words to your marketing materials will get you a lot of attention, especially in areas that require insurance but not bonding for contractors and construction companies. It's a simple step to take that protects your business anyway, so you might as well get an extra marketing boost out of it at the same time.

About Me

Smart Financial Decisions to Get Ahead

If you want to get ahead in life, smart financial decisions can help. On a personal level, you want to focus on low interest rates, strategic borrowing and setting up savings. With your business, you need to focus on similar matters, but you also have to think about investors, employee compensation, and long-term survival strategies. Whether you're dealing with one or both of these situations, I am setting up this blog to help. My name is Mary, and I have always had a strong interest in finance. As a result of my decisions, I was able to retire at 50, and now, I just write and share info. Please explore. I hope you enjoy these posts.



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