Surety Bonds Vs. Insurance

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Often, the terms surety bonds and insurance cause confusion among consumers. It is important to remember surety bonds are not insurance. Surety ship and insurance have many things in common, but they also have many unique characteristics. Let’s compare and contrast to get a clearer understanding of what a bond covers versus insurance.

What is the Difference Between Surety Bonds & Insurance

Probably the most distinguishing difference between surety and insurance is surety bonds are three party agreements while insurance policies are traditionally only two-party agreements. The three parties to a surety bond are the surety company (traditionally an insurance carrier or surety company with large reserves), the principal (the entity performing a contract or fulfilling an obligation) and the obligee (the entity that is being protected). The surety company guarantees faithful performance of the principal to the obligee. Surety is an industry which does not expect losses; therefore, surety premiums do not contain large provisions for expected losses. The surety takes on only those risks which its underwriting experience indicates are safe. If a loss does occur, it is because a person has failed to perform obligations they have assumed. Surety companies expect to be paid back in full for losses.

On the contrary, Insurance is a two-party agreement whereby the insurance company agrees to indemnify the insured directly for the loss incurred. The insurance industry expects losses; they are anticipated. Typically, a loss is due to an accidental occurrence such as a fire, tornado, or a theft. Insurance rates are adjusted to cover expected losses and expenses.

Who is Protected?

Another important difference between surety and insurance is who is protected. Surety Bonds protect the party who the principle is doing business with or a service for (the obligee). This party can be qualified individuals or businesses whose affairs require a guarantor. In most cases, the principle will sign an indemnity agreement. The process of indemnification guarantees that the principal and indemnitors will be responsible for repaying the surety company against any claims paid out as a result of a loss. Insurance protects the person purchasing the insurance policy (the policyholder). The responsibility for the payout of the claim due to a loss falls on the insurance company. Insurance claims are usually not recoverable; therefore, insurance companies do not expect to be repaid by the insured.

Use the chart below for a comparison review of surety bonds and insurance.

For additional information on purchasing surety bonds please visit https://ezsuretybonds.com/

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