Bonded vs. Insured Contractors: What Is the Difference?

When planning a home improvement project and hiring a contractor, there is 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 vs. Insured Contractors: Key Differences

While they might seem similar at first glance, construction bonds and construction insurance are different—and both are important for different reasons. Construction bonds are a third-party guarantee that the contractor you hire is able to do and finish the work reflected in your contract; if they cannot or do not, the surety that issued the bond will protect the bonded company against major financial losses.

Construction insurance backs the actual work that contractors do and protects the company and the client against damages and liabilities resulting from accidents, damage, and other jobsite or construction problems.

What Is a Bonded Contractor? 

A bonded contractor is a licensed contractor who has applied for and been guaranteed by a third party, such as a corporate surety. These guarantees promise that the bonded contractor will abide by and meet all contractual agreements. If they do not meet their obligations, the surety will pay the bond amount and the contractor must reimburse the surety.

Contract bonds cover many types of contractual issues, including not meeting the contract terms, not paying subcontractors or suppliers, defaulting on the project, warranty claims, and other breaches of contract. For this reason, project owners often choose to hire bonded contractors for the added peace of mind and financial security that come with the bonds.

Types of Construction Bonds

Is your contractor bonded? If so, there are several types of construction bonds that they can supply to you. The following are the most common:

• Bid bonds: Bid bonds guarantee that winning project bidders will sign the contract and meet or exceed all contract agreements. If the winning bidder does not sign or meet specifications, the project owner can file a claim to recoup the difference between the full bid amount and the next lowest bid.

• License and permit bonds: License and permit bonds guarantee that the contractor and their employees will comply with all regulations and laws. This bond is often required by regulators.

• Maintenance bonds: Maintenance bonds act like warranties, protecting project owners from defects in design and labor for a specified amount of time after the project is completed.

• Payment bonds: Payment bonds guarantee that bonded companies will pay suppliers and subcontractors for all materials and labor needed for the project.

• Performance bonds: Performance bonds are one of the most common types of bonds; they guarantee that the bonded contractor will complete the project as specified by all terms and agreements within the contract.

• Subdivision bonds: Subdivision bonds generally protect government entities and municipalities whenever land is developed. These often cover infrastructure improvements and projects such as sidewalks, roads, drains, sewer lines, and street lighting.

Best for:

• Homeowners or business owners hiring a contractor for large, expensive projects

• Those with complicated projects

• Those who want added assurance that their contractor will meet contractual obligations

• Those who stand to lose more than time and effort if their initial contractor does not come through as expected

Pros of Bonded Contractors 

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 is a good indication that 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 cannot 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 of Bonded Contractors

The contractor is the one who must obtain the bond but may charge the homeowner for the price of the bond. This can add to the cost of hiring a bonded contractor; however, the peace of mind may be worth the added expense, especially for larger, more expensive, and more complex jobs.

If there is a default, collection may prove difficult. The surety company may disagree that there was a default, forcing the homeowner to court, where it is the homeowner’s responsibility to prove the contractor defaulted on their agreement and calculate the losses.

Sureties also assume responsibility for the contract and the project if they find that the contractor is in default. This can lead to homeowners losing control over the quality and details of the job. Some sureties try to minimize costs, and this can result in lower quality work, cutting corners, and compromises in overall job quality; simply put, the job may not turn out as clients expect, even though bonds are intended to protect their interests.

What Is an Insured Contractor?

Insured contractors have active commercial insurance policies through a third-party insurer that protect the contractor’s company, the project they are working on, and their clients against certain claims and incidents. Contractors secure insurance by paying premiums; if something goes wrong, the insurance company will pay the claim.

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.

Types of Contractor and Construction Insurance

Is your contractor insured? If so, they will hold one or more of these common types of contractor insurance:

• Builder’s risk insurance: Builder’s risk insurance covers buildings that are under construction, equipment, and materials against damage or loss due to fire, theft, vandalism, weather, and other causes.

• General liability insurance: General liability insurance is the most common type of construction insurance and is required for most licensed contractors. It covers property damage or bodily injury caused by a contractor or one of their employees. 

• Professional liability insurance: Also known as errors and omissions (E&O) insurance, professional liability insurance covers contractors against negligence or incorrect professional advice that causes a financial loss.

• Workers’ compensation insurance: Workers’ compensation insurance coverage protects contractors and homeowners against the costs of injury or illness on the job. It will pay medical bills for company employees and is required for most licensed contractors that have one or more employees.

Best for:

• Any homeowner or client hiring any contractor to work on their home or business

• Projects of all sizes, amounts, and complication levels

• Those who wish to protect their homes and personal liability status

Pros of Insured Contractors 

Requiring any contractor who works on your property to carry general liability and workers' compensation insurance is a good way to protect yourself. After all, if a roofer damages your property or has an accident while repairing your roof and the contractor is not insured, you could be on the hook for damages or 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 of Insured Contractors 

Requiring insurance for a contractor may limit your selection, as not all companies are insured. 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 do not want to cut.

Bonded Contractors vs. Insured 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: Tie

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 do not have to pay back the claim if covered by an insurance company.

Protection: Insurance

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

Requirements: Tie

A surety bond often is a bare minimum for contractors to be licensed. Insurance is usually optional unless 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.

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. If the contractor you hire is bonded, you will not be on the hook if they default on the contract; and if the contractor you hire is insured, you will not be liable for any workplace accidents on your property. Generally, the most reputable and skilled contractors are bonded and insured and, therefore, most likely to complete the project satisfactorily and without incident.