Licensed, Bonded, and Insured: What's the Difference?

As a business owner or consumer, you’ve probably heard the phrase, “Licensed, bonded, and insured” a few times. Many service-based companies use this phrase in their advertising to assure customers they can expect a high level of both quality and professionalism.

Typically, most people understand what it means to be insured. After all, everyone has insurance of some sort — ranging from automotive to life and everything in between.

What exactly does each term mean? We’ve broken it down for you.

Licensed

When a business is licensed, it means they have met all state and local municipality conditions to conduct business where the license was issued. Licensing requirements are in place to filter out the businesses that may engage in unethical practices. Licenses also raise the standard of work between similar competing businesses.

How to get a business license

Contact your local business license department to start the process of getting a license. Requirements can vary between municipalities, but generally you’ll have to register your business properly, complete some paperwork (much can be done online these days), and offer evidence of insurance. State and some local boards may require you to pass a contractor’s licensing exam.

Bonded

Having a bond can be described as having an additional level of insurance for your business in the event that specific conditions haven’t been met in a contract. For example, if you’re a contractor and do shoddy work, you haven’t met your contractual agreement and are liable for damages. A bond covers these types of situations.

When a business is bonded, a bonding company has secured money for the customer in the event a claim is filed.

A license and permit bond guarantees that a business with operate in accordance with federal, state and lcoal laws especially regulations concerning the specific trade.

Other types of bonds that you may need are:

Fidelity bond:

A fidelity bond ensures that a business is protected against fraudulent activities committed by employees. These bonds are necessary for larger companies with a greater number of workers. Employees committing wrongful acts leave businesses vulnerable to lawsuits as a result of damages. Activities like cash theft, stealing from clients/customers, and company property damage are all examples of what a fidelity bond could be used for.

Contract bond:

Contract bonds are more job-specific and typically cover the “performance” of the contract. It assures a specific standard defined in the contract is fulfilled. For example, timeliness of the job, budget standards, etc. are all factors of a contract bond.

As bonds can protect from various scenarios, make sure your business has the proper risk management strategy.

Insured

Every business needs insurance in the event of a loss. Damages like property destruction, commercial vehicle accidents, and unforeseen catastrophes all leave businesses vulnerable to financial devastation.

Bonds do this in a way too, but while it may seem bonds and insurance offer similar protection, there are several key differences between the two. With insurance, the contract is between two parties only — the business (insured) and the insurance company (insurer). In the event of a loss covered in the policy, the insurer guarantees compensation to the insured. Insurance offers coverage to the business as a policyholder, while a bond covers the customer against a breach of contract by the business.

In the event of a claim, the insurance company covers the loss but is not repaid by the policyholder (monthly premiums ensure this coverage). With surety bonds, the bonded is expected to pay for any claims.

Insurance protects you against losses and is vital to the longevity of your business. The most common policies held by businesses are typically commercial property and general liability insurance. An agent can help you determine what type of coverage you need to keep your business protected. Carrying a license, bonds, and insurance may come with a cost, but failing to utilize all three could cost you much more in the long run and destroy your credibility. Don’t get caught without coverage.