The main difference between surety bonds and insurance lies in the parties involved and the nature of the financial protection provided.
Simply put, surety bonds involve a three-party agreement among the principal, the obligee, and the surety company (i.e. insurance brokerage). Surety bonds are required in various industries or for specific projects to ensure compliance, completion, or payment.
Insurance, on the other hand, typically involves a two-party agreement between the insured and the insurance company. Insurance provides protection against potential future events or risks, such as damage, loss, liability, or illness.
While both surety bonds and insurance involve financial protection, there are few key distinctions that savvy business owners should get familiar with.
Continue reading to learn more about the intricacies of surety bond vs insurance.
What Is an Insurance Policy?
An insurance policy is a contract that says the policyholder or the insured (in this case, it’s you) will receive financial protection against losses from their insurance providers.
This also includes reimbursem*nt for repairs in case of damages incurred during an unfortunate event. Most business owners have an insurance policy to secure their business’s future in the event of a lawsuit or legal claim.
Types of Insurance Policies
There are a lot of policies for business owners and contractors to choose from.
The gold standard for businesses is known as commercial general liability insurance, which protects you and your business from a wide range of risks that could result in claims. Then, there are specialized policies such as snow removal insurance—this is a type of policy under construction insurance specifically designed for snow removal businesses.
In any case, the insurance provider works with the policyholder to build a comprehensive policy package to guarantee that they will be covered from financial losses as long as it is within their policy limits.
What Is a Surety Bond?
Conversely, a surety bond is a legally-binding agreement that serves as a guarantee that a task or project will be carried out. It involves three parties:
- The surety is the company that provides the bond. They are obligated to be held liable in case a project or a contract falls through due to debt or another party fails to complete their duties. The surety company is your insurance provider.
- The obligee is the party that is protected by the bond. This is your client, a government agency, or a private developer to whom you have become obligated.
- The principal is a contractor or a business that’s bound by the contract to perform the tasks stated in the surety bond.
These parties are tied together by the surety bond. Think of it as a promise made by the principal through the surety company to an obligee that they will complete the contract.
The principal must also guarantee that the project will be carried out legally, per a set contract, and according to industry standards.
Types of Surety Bonds
- Contract bonds, also called construction bonds, hold a contractual agreement with one party to ensure they meet the terms established by another party. This type of bond is often required on construction projects to ensure deadlines are met. Three types include bid bonds, performance bonds, and payment bonds.
- Commercial surety bonds protect consumers against fraudulent activities or financial risks. These are typically required by government bodies to ensure a contractor or business complies with all legal and licensing requirements while fulfilling a task or providing a service.
- Court bonds may be required by a judge to hold one party financially liable if they fail to act in a manner expected in a court of law. These bonds are common in civil cases.
- Fidelity bonds protect a business and its clients in case an employee from that business acts unlawfully. These types of bonds are similar to an insurance policy in that they pay the bonded party, whereas other types hold the bonded party liable for damages.
Key Differences Explained
Now that you know the basics of an insurance policy and a surety bond, it’s time to explore their key differences.
Who Is Protected?
An insurance policy will cover you and/or your business from financial loss when an unfortunate event leads to a claim or lawsuit.
Meanwhile, a surety bond will protect the obligee by reimbursing them if the principal fails to complete a task. Therefore, their purpose is to ensure your obligations are fulfilled within the established deadline.
What Do They Cover?
Insurance policies are general, meaning businesses will purchase insurance packages that would cover their entire operations or projects.
Surety bonds are specific and typically cover one area, such as a payment bond or a permit bond.
How Are Claims Triggered and Handled?
For an insurance claim to be triggered, damages of some kind must occur. This includes third party bodily injuries and property damage due to natural events. There must be some harm that activates your insurance coverage.
When the policy is triggered, the insurance company then absorbs the loss and provides a payout on a claim for the insured—provided the claim is within the policy limits.
A surety bond claim is triggered if you fail to meet your obligations in a specific situation and under the type of bond you purchased. However, this comes after an investigation where the surety must conclude that the claim is legitimate.
Once that is confirmed, the surety will then step in to try to fix the situation based on the specific claim. Then, the surety will pay the cost of the claim. The principal would then have to fully reimburse the amount to the surety, plus any legal fees.
Get Comprehensive Surety Bond and Insurance Coverage with KASE Insurance
People often confuse surety bonds and insurance policies because businesses typically require both to secure their finances. No matter what you need, it’s important to choose an insurance provider that can offer you customizable solutions that will protect you against financial losses.
We at KASE Insurance provide exactly that. We are an award-winning insurance brokerage based in Toronto providing affordable and comprehensive surety bond and insurance policies.
Contact us today to learn more about our services, or call us for a quote.
