Surety bonds and liability insurance are two very different types of coverage that contractors should be aware of.

A bonded contractor provides more financial security to customers and partners, and a licensed contractor is more protected from internal financial loss. Being both licensed and insured provides a high level of financial security for the contractor and the project alike.

Learn more about the differences between bonds and insurance below.

Coverage

Surety bonds are designed to protect customers and employees from unlawful actions, poor job performance, or dishonest practices. If there is a contract in place, the bond may be used to ensure the contractor meets the requirements laid out in the contract, such as budget, deadline, and project specifications. When a contractor advertises themselves as "bonded," it gives customers and partners peace of mind that the contractor is financially invested in successfully completing the project.

Liability insurance is designed to protect contractors from financial loss due to injuries, stolen equipment, or other covered incidents. Coverage varies based on the insurance provider, the contractor’s line of work, and the specific plan involved.

Costs and Rates

The contractors bond amount is often set by law. For example, California contractors must have a $15,000 license bond on file with the Contractors State License Board. The contractor pays a percentage of the cost of the bond to obtain it, and rates may vary based on strength of credit. Many bonds cost between 1% and 5% of the bond’s value, but contractors with weak credit may see rates as high as 5% to 20% of the bond’s value.

Premiums, rates, and coverage for liability insurance can vary widely. Contractors pay a monthly premium to the insurance company for coverage, but are not liable for paying out claims (assuming the incident is covered by the insurance policy).

Beneficiaries

In states like California, contractors are required by law to be bonded in order to obtain their contractor’s license. Bonds are required to protect the customers, and even employees, in the event of a contractor’s unprofessional or unlawful actions. The most direct beneficiaries of contractor’s bonds are the customers and employees, who are protected in the event of unprofessional or unlawful behavior by the contractor.

For liability insurance, contractors themselves are the most direct beneficiaries. Liability insurance prevents contractors from serious financial loss in the event of property damage or injury.

Claims

How claims are handled is one of the key differences between contractor bonds and contractor liability insurance.

When a contractor has liability insurance, the insurance company is financially responsible for claims (as long as it is covered by the police in place). The insurance company will evaluate the claim to ensure it is covered, then pay out the claim without the contractor being required to compensate the insurer.

For a bonded contractor, indemnity is involved. This means the contractor is financially responsible for any claims paid out by the bond company. When a claim is filed, the bond company will evaluate the claim by seeking information from the parties involved and/or the state licensing board to see if any professional violations occurred. If the bond company has to pay out the claim, the bond holder—the contractor—is required to pay back the amount of the claim to the bond company.

In this way, a bond is like a line of credit. The bond company will provide the initial payment for the claim, but the contractor must pay back the cost.