Another one from the in-box:
We own a small landscaping company, and my husband insists that it is better to be able to tell potential commercial customers that we are bonded… but I am not sure that is what we need. I think that a BOP [a Business Owner’s Insurance Policy] will suit our needs. Which of us is right?
Good news: you’re both right!
It turns out that liability insurance, such as you’ll find as a component of a BOP, is a very different animal from a surety bond. Both serve important roles in contract businesses like construction and landscaping, and both help a prospective client feel good about a contractor by reducing the client’s exposure to specific risks.
Liability insurance works like this: let’s say a landscaping contract involved planting a number of trees along the side of a building, and to expedite your work you rent a small backhoe… which promptly bites a chunk out of a corner of the building. Who pays for the damage?
Ideally, of course, you do, since you did the damage. Often, however, a small company simply doesn’t have the funds to carry that kind of expense, which is why liability insurance is a good idea. Of course, your client also has insurance: property insurance. If you aren’t covered, and can’t pay, you can be sure that your client’s next stop will be his property insurer. This insurer might pay, but will take a bite back out of your client in the form if increased rates. Oh… and they’ll sue you as well. By requiring you to carry adequate liability insurance, your client keeps his own insurers happy and his rates low, and you stay out of court.
Now, let’s say you get halfway through a $50 thousand contract and meet a great new client who wants to hire you to do the same kind of work for ten times as much… but you have to start tomorrow. If you walk out of your contract, your previous client can sue you until he’s blue in the face—and maybe even collect damages!—but, in the mean time, who is going to finish his landscaping?
A surety bond guarantees that the job will get done, by putting aside a pile of cash against the chance that—for whatever reason—you don’t fulfill your end of your contract. Moreover, very few surety agents will issue a bond to a contractor with a history of walking out on contracts, so holding such a bond is a great way of assuring a prospective client that you have a track record of keeping your promises.
Can it be expensive to carry both liability insurance and a surety bond? You bet. The good news, however, is that—in a free market such as ours, anyway—properly bonded and insured contractors get to charge premium rates, because their clients are assured of getting the whole job done with minimal risk to themselves.