How are surety bonds different from insurance
There is a fundamental resemblance between a surety bond and an insurance policy in the sense that there is a guarantee of indemnity for one of the parties involved. Nevertheless, a surety bond is not the same thing as an insurance policy.
An insurance policy is a kind of contract between two parties, the insured and the insurance company, in which the insured agrees to pay the insurance company a premium in exchange for the policy’s benefits in the case of a loss.
On the other hand, when it comes to a surety bond, there are three different parties involved:
- The principal – the entity that is being guaranteed
- The bonding business
- The obligee – the party in whose favor the bond is issued
Regarding who is responsible for paying the premium, the principal is almost always the one to do so. However, there are times when the obligee is the one who does.
According to the principles that govern suretyship, the principal is obligated to compensate the surety for any financial loss that may be sustained by the surety as a direct result of the execution of the bond.
Before the bond may be given to the obligee, the principal is needed to sign either an indemnity agreement or a counterbond in favor of the bonding business.
When deciding whether or not to issue a bond, the surety takes into account the character, personal circumstances, as well as the resources of the principal.
Furthermore, depending on the nature of the bonding obligation, the surety may also require adequate security in the form of collaterals, such as real estate, stocks, and other acceptable securities or the signatures of guarantors.
More on their differences
- A claim on an insurance policy is often initiated by the occurrence of some form of harm, but a claim on a surety bond is typically initiated by the principal either becoming insolvent or failing to pay. It is necessary that there be damages in order for an insurance policy to pay out. It does not matter whether someone is hurt on your property or if a fire destroys it – there has to be some kind of damage in order for the insurance policy to kick in and provide compensation. Payment on a bond is made regardless of whether or not any harm has occurred. It simply requires that you be unable to satisfy your financial commitments in a certain circumstance, which will vary depending on the sort of bond that you acquired.
- Insurance policies are often more tailored to the individual company, while bonds are typically produced on conventional bond forms. Bonds are commonly supplied by local or state governments or are standardized in particular sectors, while insurance policies are typically customized to support the operations of a firm. Nevertheless, this is not a hard and fast rule, and it is important to note that there are exceptions.
- Surety bonds are designed for particular projects or promises, while insurance policies focus more on covering generic risks. When looking to get insurance, businesses often look for a general liability coverage that protects all of their many projects and activities. The vast majority of companies will just need to purchase a single general liability policy. You may secure a surety bond for a project or a licensing bond for the state or local government. Bonds, on the other hand, are of a highly specialized type and cover certain regions. A single company may have many bonds at the same time if they so want.
A contract that stipulates the terms of your relationship with an insurance provider is known as an insurance policy. This contract makes the guarantee that the insurance company will indemnify you, which means they will pay on your behalf for certain losses that you cause due to carelessness and for which you are thus legally accountable.
In layman’s terms, insurance enables you to pay a monthly cost that is foreseeable and arranged with the insurance company in return for the company covering for unexpectedly huge losses that occur in your firm. The contract has the potential to reduce the amount of damage caused by an accident.
A surety bond provides a financial guarantee that in the event that the principal, which in this case is you, is unable to fulfill the contractual obligations that have been agreed upon, the surety, which is the bonding company, will step in and fulfill those obligations on your behalf.
A claim on a bond occurs when a firm is unable to meet its commitments, often as a result of bankruptcy, as opposed to insurance, which typically needs some form of harm to occur in order to be paid out.