Bonded and Insured – What Does it Actually Mean?
You have heard it asked many times before. Maybe you have even asked it yourself, but what does bonded and insured really mean? Why do you need to ask vendors about this? Is this really important?
First, I will explain what each means. Then, I will go into detail about what is important with these terms.
There are only three types of bonds available. The first is a bail bond. This only applies to people who are trying to get out of jail, therefore it is not applicable to hiring a vendor. The second is an employee dishonesty bond, or a surety bond as they are also called. The third is a performance bond. These are frequently used by contractors to guarantee their services.
I will skip discussing the bail bond.
An employee dishonesty bond, or a surety bond is issued by an underwriter to guard against theft. These are issued in various amounts. The most common is $5,000. I will use an example of how this would work. Let’s say you hire a contractor to work on your home. In the process of their working on your home, you notice that some of your jewelry is missing. You contact the police and the bonding company. After an investigation, it is determined that the contractor took your jewelry.
The bonding company will then notify you that they will award the price of the jewelry, or the maximum amount covered by the bond. The bonding company will wait for a conviction of the person who took your jewelry. If the adjuster determines that the value of your jewelry is $6,000 and the surety bond is for $5,000, they will award you $5,000 because that is the maximum covered by the bond. There are conditions to this. The bonding company will only award the amount if the item is not recovered. And, the bonding company will only award after a court conviction takes place.
A performance bond is taken out to guarantee service or work. Again, another example. Let’s say you hire a contractor to build your dream home. The price to build your home is $250,000. A surety bond for the project could be issued to you at the cost of the contractor. This would cover you if the contractor tries to leave before the project is complete. Or if the contractor does not fulfill obligations agreed to in the contract. If you go through a bank to get your home built, they will most likely require the bond be issued to them, since they will be a greatest exposure to loss. Performance bonds can be taken out on a variety of things, but are most frequently used in the construction or contracting business.
Speaking as an owner of a janitorial company, there are things more important than a bond. There are many companies that cover theft internally. In other words, they have a policy about theft and cover the losses themselves due to the size of their companies. If theft is concerned, simply ask up front, “What is your policy on employee theft?” You will also want to ask about background checks on personnel. If a company is willing to cover theft internally, you can be sure that they will use a criminal background search that is accurate.
As far as insurance is concerned, the insurance being referred to is called commercial general liability insurance. This insurance will provide coverage for a variety of things. Some of the things covered are: damage to your premise, personal injury, and completed product or operations (workmanship). We will break each of these down for further explanation.
Damages to your premises includes accidents. If you hire a floor service to strip and wax your floors, and they lose control of their equipment and it damages a wall. This would be covered in the commercial general liability insurance. The deductible would be the responsibility of the contractor or vendor. There are a variety of things that can be damaged in your facility. Whether it is paint scrapes, broken glass, or damage to your contents.
Personal injury in this case would include injury to your personnel caused by the vendors personnel. Let’s say that the same floor service company injured your personnel when they lost control of their equipment. This is covered by some commercial general liability policies. It is important to look at the amount covered on these separate items.
Completed operations or workmanship is a broad range of items. If the same floor service company did not live up to their promise of stripping and waxing your floor, this would fall under completed workmanship. If damages occurred during this process, this is also covered, same as the damages mentioned above.
To seek compensation for anything that is covered by the commercial general liability insurance, there are several steps that have to be followed. First, the insurance company must be contacted as soon as possible. The insurance company will then send out an adjuster to assess the damages. Once a damage figure is established, the insurance company will contact you back about compensating for your damages. If there is any deductible on the policy, it is the responsibility of the contractor to pay for it.
There are several things you should do when interviewing a potential vendor. First, ask for a copy of their insurance. Then, contact the insurance company to make sure the policy is valid and in good standing. You can also ask at this time exactly what is covered. This will be a big help before hiring any vendor.
If a vendor does not have insurance, you are at risk for exposure to loss for anything they damage. Sure you can sue their company if they damage your facility, but if they do not have insurance, what are the odds that they have assets to cover your losses?
In closing, the most important thing to look at is the commercial general liability insurance. If a perspective vendor does not have a commercial general liability insurance policy, avoid them like the plague. If a vendor tells you they have commercial general liability insurance, ask for a copy. Then contact the insurance company listed at the top and check the validity of this policy. Also, ask about coverage amounts.