Surety Bonds vs. Insurance Policies: What’s the Difference?
June 16, 2020
A surety bond is a written contract in which one party guarantees another party’s performance or obligation to a third party. It provides monetary compensation or satisfactory completion of an obligation should there be a failure to perform specified acts within a stated period of time.
Understanding the basics of surety may help you retain important customers and may lead to more opportunities to grow your customer base.
There are three parties to a surety bond: the principal, the obligee and the surety. In comparison, insurance involves two parties: the insured and the insurance company.
Parties to a Surety Bond:
Principal – This is the person or business required to be bonded by the obligee. The Principal is obligated to the obligee to pay and/or perform according to a law, ordinance, rule, regulation, contract, license or permit.
Obligee – This is the party that requires the principal to provide the bond. The obligee is protected from loss by the surety if the principal fails to fulfill their obligations.
Surety – This is the insurance carrier that guarantees the obligations of the principal to the obligee.
The risk of loss in property-casualty insurance is usually the accidental occurrence of events, such as a fire or a hurricane, or the occurrence of a crime such as theft. The risk of loss in surety bonding is the failure of persons or entities to perform obligations they have assumed. The following are examples of such obligations:
- To perform fiduciary obligations faithfully
- To perform official duties faithfully
- To perform a contract and comply with all its terms and conditions
- To pay obligations incurred in the performance of a contract
- To meet all ordinance or statutory conditions in performing a licensed trade or business
A bond does not protect the buyer of the bond (the principal), but does protect a third party (the obligee) from exposure to loss. The surety prequalifies a prospective principal on the basis of the principal’s credit strength, ability to perform and character. The surety fully expects the principal to undertake its obligations successfully. Unlike insurance, if a claim is made on a bond, the surety expects to be indemnified or repaid by the principal.
Know how to help your customers protect their businesses by acquiring the appropriate bonds. The inability to obtain a bond may result in losing the customer’s entire book of business.
