Understanding the distinctions between surety bonds and insurance policies is crucial whether you’re an insurance agent or someone who needs to be bonded. Surety bonds are often required by law or contract and involve less selective underwriting than typical insurance.
On the other hand, insurance is a proactive product that customers seek to mitigate risk. Insurance is also more flexible in its application.
What is a Surety Bond?
The parties to a surety bond are a principal who needs the guarantee. An obligee who needs the bond, and the surety firm that offers the bond. The obligee may submit a claim on the bond for losses up to the covered amount if the principal breaches a contractual duty.
A reputable surety agency makes applying for a surety bond easy, quickly delivers a quote, and explains what is a surety bond. Great agencies also do everything they can to keep surety bond rates fair and competitive — even for applicants with a less-than-perfect credit history. And they’ll do this all while making the process as stress-free and straightforward as possible for their clients. This way, if the bond is approved. It’s done with minimal disruption to the applicant. That’s what makes working with an excellent surety agency an intelligent choice.
What is an Insurance Policy?
Insurance describes a financial arrangement whereby one party is responsible for making another whole when that other party incurs a loss. The insured party typically pays a premium to an insurance company in exchange for its promise to reimburse the insured for losses incurred up to a specified limit.
A surety bond is a contract that assures the fulfillment of the requirements contained in the bond form and any papers incorporated by reference. If the bonded principal fails to fulfill these obligations, an obligee can file a claim against the bond seeking financial compensation for damages.
Contractors, mortgage brokers, freight companies, telemarketing agencies, and other businesses often must purchase licenses and permit bonds to operate legally. By becoming bonded, these companies demonstrate their commitment to financial responsibility and ethical business practices. In addition, some contracts involving federal funding require bid, performance, and payment bonds to be posted to secure the contract.
What is the Difference Between a Surety Bond and an Insurance Policy?
Insurance and surety bonds offer financial protection but work in very different ways. With an insurance policy, you pay premiums to help cover the cost of expected losses. The goal is never to file a claim, and many business owners obtain multiple policies for risk management.
On the other hand, a surety bond is a three-party contract between the obligee (the party the bond protects). The principal, and the assurance firm. The bond company expects to make a loss only after a claim is made. The bonded principal must reimburse them for any funds spent on settling that claim.
Additionally, to file an insurance claim, a specific type of damage must occur for the policy to be triggered. This is different from a surety bond, which carries a higher level of risk and only requires an investigation to determine whether a claim is legitimate.
How Does a Surety Bond Work?
The principal, the surety agency that issues and backs the bond. The obliges are all parties to a three-party agreement known as a surety bond. The oblige typically requires the bond as a condition of an underlying contract or due to business laws and regulations.
The bond protects the impacted party by covering initial claim costs, unlike insurance policies. Which don’t expect to cover losses and rely on large pools of similar clients paying premiums to make up for their share of the risk.
For businesses and professionals focused on attracting new customers and completing projects. The obligation to get bonded can be an unnecessary distraction. However, working with the right surety bonds partner can help keep your bonding requirements on track so your business is never at risk. Contact the industry’s regulatory authority to clarify your bonding requirements. They can provide more information on how to meet your licensing or permit bonding needs. Read more interesting articles on Theflipbuzz