A good number of contractors mostly confuse contractor bonds and liability insurance. Potential clients need contractors to uphold a certain standard. The two are very popular and might seem alike, but they could never be more different. So, how can you differentiate the two?
A contractor bond is a surety bond that is usually dispensed by the bank or an insurance company to protect the client, contractor, and company. This reassures the contractor completes the project according to terms. Conversely, general contractors insurance protect and secure the insured party from potential bodily injuries or damages.
HOW IS A CONTRACTOR BOND DIFFERENT FROM A LIABILITY INSURANCE?
Upon comprehending what the two terms mean, it is now easier to understand their one-to-one dissimilarities.
First and foremost, the two differ when it comes to coverage policies and limits. Liability Insurance is quite available within diverse coverage bounds. The price usually depends on the policy, i.e., some may start at a limit of two-hundred thousand American dollars and extend to millions. Most contractors regularly go for policies that have a limit of up to a million USD.
Alternatively, the law requires contractors to preserve an active amount of cash or license bond when contract bonds are involved. This is a circumstance for being licensed. The law usually fixes this amount, so there is no way around it. As a result, there is no free coverage choice of contract bonds for contractors.
An additional way the two contrast is the cost. Several factors contribute to how much a contractor’s bonding will total to; the contractor’s license account and credit score are such factors. Each indemnity has its distinct propriety rating method, and this makes the cost to be different greatly depending on the mentioned factors.
Nonetheless, when it comes to Liability Insurance, the insurance company may lay out different whys and wherefores (payroll, selected coverage, etc.) that may affect the cost. Typically, the policies start at a specific price per year and increase exponentially in the subject to the factors.
The third way to differentiate the two is how respective claims are run and taken care of. In the event of a claim, a contractor bond will need surety. Thus the company has to disburse money as a result of the contractor’s unauthorized activities. This payout includes the indemnity and any necessary additional expenses.
Accordingly, the bond company also has to appraise the case by conducting proper research and contacting both parties for essential information helpful to the situation. This helps conclude if indeed a violation has transpired or not.
Claims related to Liability Insurance do not demand any form of security or security at all. Upon the filing of a specific claim, the company analyses the claim and the related policy to determine if it is covered by the policy or not. This means the law does not bind the contractor to pay out under ordinary context.
Finally, the rates of each surety tell apart a contrary bond and the liability insurance. The former does not usually need the contractor’s credit score or license history for the company to decide the rates. In some situations, however, the company might need these if allowable by the law. In liability Insurances, however, the company will utilize its rating system to know what rates apply to the specific contractors.
Companies usually depend on the works of the contractor and how good or even bad they are doing in terms of revenue to foresee potential risk. In such cases, percentages are pulled together from a strong group of policyholders and used to reimburse claims of a trivial few if and when they come about.
Every contractor licenses their bonds no matter the company allotting it whereas Liability Insurance policies will always have security barring with different policies having different exclusions. Bonding companies have to make sure you can well account for the money they pay out.
In a nutshell, the critical difference that will always stand is which party stands to get financially reinstated. None is a substitute of the other but are both handy services. Anyone interested in applying for either should know what they are up for beforehand.