Comparing surety bonds and insurance policies can be difficult because they both provide protection to individuals and businesses, but their approach to protecting those individuals and entities is different in many ways.
A surety bond is a contract between three parties: the principal (the business/individual seeking the bond), the obligee (the entity requiring the bond) and the surety (the issuer of the bond). The purpose of a surety bond is to protect an obligee against any financial loss resulting from failure of no-performance by a principal. A surety bond does not protect the principal from their own mistakes or losses, it merely guarantees the obligee that if certain obligations are not met, those losses can be recouped from a third party.
An insurance policy protects against various risks like property damage, theft, liability and health risks to individuals or businesses. An insurance policy generally involves significant risk management practices on behalf of both parties involved: insurer-insured relationships typically involve careful calculations in order to ensure all potential risks are covered.
Similarities Between Surety Bonds and Insurance Policies
Surety bonds and insurance policies both protect against financial losses. Both act as a form of financial guarantee that covers risks such as theft, property damage, personal injury or obligation defaults. They both require a premium paid in order to purchase the coverage, known as the bond/insurance premium.
A surety bond provides the borrowing party with a guarantee with regards to fulfilling obligations and paying damages if the obligation is breached or not completed.
An insurance policy usually provides coverage for any specified losses up to its limits (and after you have met relevant deductibles).
Differences Between Surety Bonds and Insurance Policies
Surety bonds and insurance policies offer financial protection for individuals and businesses but work in fundamentally different ways. An insurance policy provides one party, the insured, with protection from losses or damages resulting from a set of specific risks. The insurer indemnifies the insured for these losses or damages if found to be valid. A surety bond, on the other hand, does not protect an individual or business from financial loss. Instead, it provides a guarantee that a person or company will complete their contractual obligations and could be held responsible if they fail to do so.
While both surety bonds and insurance contracts come with some form of financial reimbursement when triggered by an event, they differ in their nature of coverage. An insurance policy serves as protection against unexpected loss due to events such as fire damage or theft whereas surety bonds provide assurance of adherence to contractual obligations such as payment guarantees and compliance with local government regulations.
Further distinctions include:
- Insurance policies are used to protect an individual or business in case of unexpected losses while surety bonds guarantee completion of specified obligations.
- With insurance policies, the insurer pays claims while with a surety bond the user/principal is obligated to pay the claim. (If responsible/ negligent of their obligations)
- Insurance policies will cover any losses sustained by one person (the insured) while surety bonds guarantee that one person (the principal) will uphold specific obligations.
- Insurance may be required by law but is often an individual choice while surety bonds are often required by law.
Another key difference between surety bonds and other forms of insurance is that they require three parties to be involved in the agreement as stated above—the principal (the individual or entity required to have the bond), the obligee (typically an issuing entity such as a government or regulatory body requiring the bond), and the surety company who issues the bond—whereas other forms of insurance require only two parties.