Surety Bonds vs. Insurance: What’s the Difference?

In many industries, contracts or licenses may require both surety bonds and insurance. Though they might appear similar, they serve different purposes and involve different parties.

What Is a Surety Bond?

A surety bond is a contract that financially guarantees a particular job or service will be completed according to the conditions outlined in the bond. It involves three parties:

• The principal (the party that purchases the bond, typically a business owner or contractor)

• The obligee (the party that requires the bond, often a government agency or client) and

• The surety company that issues the bond

If the principal does not fulfill the contract terms, the surety may cover the loss, but the principal is still responsible for repaying the surety.

Surety bonds are commonly required in construction to qualify for government contracts. Other businesses, such as auto dealerships and liquor stores, may also need them to meet licensing or permit regulations.

How Does a Surety Bond Differ from Insurance?

Surety bonds and insurance have different purposes. Surety bonds guarantee that a particular obligation will be fulfilled. Insurance, however, is designed to protect the insured from financial loss due to unforeseen events like accidents or theft.

Another key difference is how claims are handled. With insurance, the insurer may pay claims and absorb the loss. With surety bonds, the surety may pay the claim upfront but expects repayment from the principal. This means surety bonds don’t shift the risk away from the principal like insurance does.

Finally, the cost structure also varies. While insurance premiums are often based on the risk of potential loss, surety bond costs are more about the principal’s financial strength and creditworthiness. Sureties review financial statements to assess the applicant’s ability to fulfill obligations. Strong financials (e.g., good cash flow and low debt) can lead to lower premiums.

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Reach out to Sweet Insurance Agency for guidance on meeting your bond and insurance requirements. Contact us today to request a free quote.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.