What's the Difference Between Bonded and Insured Contractors?

D.P. Taylor
Written by D.P. Taylor
Updated February 3, 2022
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Highlights

  • Bonded contractors have a surety bond in case of contract default.

  • Insured contractors carry liability and worker's comp insurance.

  • Bonded contractors must pay back the surety.

  • Insured contractors pay premiums and don't have to pay back a claim.

  • Insured contractors have more protection than bonded contractors.

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When planning a home improvement project and hiring a contractor, there's always some risk involved because every house has its own quirks and challenges. You can protect yourself and your home by finding a contractor who is bonded, insured, or both. This guide breaks down the key differences so you can make an informed decision and have peace of mind that your project is starting on the right footing.

Bonded Contractors Pros & Cons

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When a contractor is bonded, that means a third party company has issued the contractor a surety bond, which makes the surety company liable for debt, default, or any other failure on the contractor’s part. Essentially, if something goes wrong with the project and it's the contractor's fault, you won't be on the hook for damages. The contractor's surety company will step in and handle everything from completing unfinished work to redoing portions of the project that aren't up to par.

Here are some pros and cons to working with a bonded contractor.

Pros

In order to get a bond, the contractor must meet the surety's prequalification requirements—and it is a rigorous process. If they are successful in obtaining one, that's a good indication the surety is confident the contractor can successfully execute the contract; conversely, failure to get the bond is a sign that you should maybe choose a different contractor.

Bonds also protect you from losses if the contractor can't execute the contract because of financial issues or a lack of qualified workers. Because the contractor must pay the surety for any losses, the contractor is less likely to default on the contract due to the tremendous risk to their business.

Cons

The contractor is the one who must obtain the bond but may charge the homeowner for the price of the bond.

If there is a default, collection may prove difficult. The surety company may disagree that there was a default, forcing the homeowner to court.

Insured Contractors Pros & Cons​

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When a contractor is insured, they are backed by an insurance policy that covers certain claims or incidents. The contractor pays a premium and is financially protected if something goes wrong. While insurance sounds similar to a surety or construction bond, it works a bit differently. For example, a bond requires repayment, whereas an insurance premium covers expenses in the event of necessary project remediation.

Pros

Requiring a contractor to carry general liability and workers' compensation insurance is a good way to protect yourself. After all, if a roofer has an accident while repairing your roof and the contractor isn't insured, you could be on the hook for that worker's hospital bill—and your homeowner's insurance may not cover it. General liability and workers' compensation insurance cover most project worst-case scenarios.

Cons

Requiring insurance for a contractor may limit your selection, so it might take some additional time to find the right pro for your project. However, general liability and workers' compensation are relatively standard throughout the building industry and most trades. You may have to pay more to work with an insured contractor, but that is one corner you definitely don't want to cut.

Bonded Contractors vs. Insured Contractors

 Bonded contractors versus insured contractors, with surety companies covering bonded contractors

The differences between bonded and insured contractors can be important to homeowners depending on their type of home project and the surrounding circumstances. Here are a few ways to understand how they differ.

Cost

Because a contractor must pay back a surety bond if it is ever used, it costs very little to put one in place. On the other hand, an insurance policy involves a potentially expensive premium; however, contractors don't have to pay back the claim if covered by an insurance company.

Most cost-savvy: Either, depending on your project

Protection

Surety bonds generally only cover the contract itself. Insurance goes further, covering claims of injury or damage. As a result, this may make insured contractors more attractive to homeowners than hiring contractors who are only bonded.

Most coverage: Insurance

Requirements

A surety bond often is a bare minimum for contractors to be licensed. Insurance is usually optional unless it's required under the terms of the contract. As a result, if it is important that the contractor you hire is insured and bonded, you should stipulate that in the contract.

Most qualified: Either, depending on your project

Why it Helps to Hire a Contractor Who is Both Bonded and Insured

Choosing a bonded and insured contractor near you provides you with the most protection possible. Since the contractor is bonded, you won't be on the hook if they default on the contract, and because the contractor is insured, you won't be liable for any workplace accidents on your property. Generally, the most reputable and skilled contractors are bonded and insured, and therefore, they'll be most likely to complete the project satisfactorily and without incident.

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