Whether you’re just starting your own business or your company has been around for years, if your company enters into contracts for construction, manufacturing or supplies, then chances are your company needs to be bonded. So what is the difference between a surety bond and insurance?
The Simple Answer:
Insurance protects the company, surety bonds protect the customer.
Of course, it’s a bit more complicated than that. These are some of the differences between insurance and surety bonds.
- Insurance – The contract is between the insurance company and the business being insured. This contract provides a guarantee to the insured that in the event of a covered loss, the insurance company will pay out whatever compensation is necessary.
- Surety Bond – The contract is between three or more parties: the surety (the company that issues the bond), the principal (the business performing the services or supplying materials), and the obligee (the client who is purchasing the services or materials). If the principal fails to make good on their obligations, the obligee will be reimbursed for any losses that are guaranteed on the bond.
- Insurance – When a claim is made, the insurance company is not compensated for any payouts.
- Surety Bond – When a claim is made, the surety pays the obligee (client) and the principal (business) is expected to reimburse the surety for any expenses paid.
Insurance – Life happens and insurance companies take this into consideration when entering into a policy. Most risk is managed by increases in premiums.
Surety Bond – Unlike an insurance policy, the principal needs to have good credit & a clean business record to get a surety bond. If the principal does not have good credit or a clean business record, then the cost of the bond increases significantly. In the case of risk management, surety bonds act like a credit card company rather than an insurance company.
Insurance – The purpose of an insurance policy is to protect a business from occurring substantial losses in case something goes wrong.
Surety Bond – The purpose of a surety bond is to prevent businesses from partaking in illegal or unethical business practices as much as possible.