When discussing surety bonds vs. insurance policies, it’s important to understand the key differences, because they have very different purposes and ways of obtaining them. Since surety bonds are often called “surety bond insurance” or “surety insurance,” it’s easy to understand why the differences between the two become blurred to contractors.
To help dispel any confusion regarding a surety bond vs. insurance policy, read below and learn the many important differences between the two.
How Surety Bonds Work
A surety bond essentially guarantees that a specific task will be completed according to the contractual terms. This agreement is made between three parties:
Principal: This is an individual or business that has purchased the bond to guarantee the task in question, payment or service, will be finished.
Obligee: This is the entity that requires the bond, such as a government agency or general contractor.
Surety: The company that is backing the bond if the principal fails to fulfill it.
Surety bonds are often required for contractors or subcontractors for public construction projects. This is true in California where any construction project using tax dollars requires a surety bond.
For more information on the different kinds of surety bonds you’ll likely need for public projects, explore here: California Surety Bond – CSBA
How Insurance Policies Work
There are many kinds of insurance policies, from life insurance to medical, and each has specific things it covers or protects. At its core, all insurance policies revolve around the same basic concept: by paying a premium, something you could lose or be unable to pay for at the time will be paid for by the company you purchased the policy from. Some types of insurance, like auto, may be required by law while others, like life insurance, are entirely your decision.
Surety Bond vs. Insurance
Now that you know the basics of how a surety bond and insurance policy both work, we can discuss the differences between them:
- Who is involved in a surety bond vs insurance policy
- A surety bond involves three parties: the principal, obligee, and surety company itself whereas the insurance policy is between the insurance company and the insured.
- Risk management
- One big difference between insurance and a surety bond is how risk or liability is managed. An insurance company expects losses, and to help offset them, they adjust their premium rates to cover the losses and expenses. A surety, on the other hand, doesn’t charge premiums that are high enough to cover losses, so they only take risks that are qualified and seen as safe.
- Recovering Losses and Claims
- An insurance company doesn’t expect to be repaid by the insured. After all, that is the point of insurance to mitigate risk. For a surety, on the other hand, the agreement is more like a bank loan where they require the contractor to repay them if there is a loss under a bond.
- Who is protected by surety bonds vs. insurance policies is also a key difference. The surety, out of the three parties involved, only protects the obligee, not the principal, while the insurance policy protects the insured.
Each of these differences is important to understand when looking to get bonded, and as you can see, you shouldn’t think of a surety bond like insurance. They not only work differently, but their purposes couldn’t be further apart.
The Difference Applied to Bonding
Another key difference to note in the surety bond vs. insurance policy discussion is who to go to.
A surety specialist understands these differences extensively, their entire profession is dedicated to knowing the surety bonding process and what can be done with it to benefit your business. Since there are many differences between an insurance policy and a surety bond, it would be inappropriate to go to an insurance agent rather than a surety expert. We at CSBA believe in financial literacy and education as much as we do in the importance of good bonding practices, which is why we publish these articles to California contractors.
We invite you to explore the CSBA difference and experience having an expert partner in surety bonding that can help you grow your business.