Surety bonds and insurance are both used to protect from damages, but they are two different types of risk management. It is to note that surety bonds are not insurance. There a few key differences between surety bonds and insurance that we’d like to point out.
Difference #1: The number of parties involved
For insurance, there are two parties involved in a contract – the Insured and the insurer.
For surety bonds, there is usually a three-party agreement:
The obligee (the entity or individual who requires the bond)
The principal (the entity or individual who needs to purchase the bond)
The surety company (the entity that is supplying the bond)
Difference #2: What is guaranteed
For business insurance, a covered loss is guaranteed.
For surety bonds, a commitment from the principal is guaranteed.
Difference #3: Who is protected
For insurance, a policy is taken out to protect a business from a covered loss. It could be required, but most of the time, a business chooses to purchase insurance to protect themselves from potential loss.
For surety bonds, the obligee requires the principal to purchase the bond. The surety company will compensate the obligee if the principal fails to meet the terms of the contract. So, the surety bond protects the obligee from losses.
Difference #4: Who covers losses/is responsible for claims
For insurance, the insurance company is responsible for claims. They pay out a claim against the insurance policy and absorb financial loss. A business may be required to pay a small amount, depending on the policy.
For surety bonds, the surety company will pay the cost of the claim, however, the principal will need to fully reimburse the Surety Company. Think of a surety bond as a line of credit for the principal. It will cover the cost of the claim until the business is able to repay the surety company in full.
With surety bonds and business insurance, the risk of issuing the policy is examined by an underwriter who determines premium cost and eligibility based on different factors. For more information on surety and how R&K’s expertise will help to meet all of your domestic and international bonding needs, please see the Surety section of our website.