Wait, Surety Bonds Aren’t Insurance?

Contrary to popular belief, surety bonding is not insurance. What are the differences?

Three vs. Two Party Deal

When it comes to Surety, it’s a three-party deal:

• Obligee (Project Owner) – The entity or person protected by the bond
• Principal (Contractor) – The persons who obtain the bond
• Surety (‘Insurance’ Company) – The entity that backs up the Principal and allows the bond to be issued

Whereas insurance is a two-party deal:

• Insured – Person protected by Insurance Policy
• Insurer – The entity that provides the insurance policy

 

Losses

Surety bonds are underwritten assuming that a loss will not occur. Insurance companies underwrite policies in anticipation of expected losses.  

Process

Once a surety company agrees to write a bond, an indemnity agreement is signed and the bond is purchased. At that point, you’d enter a contract with the surety and are expected to fulfill your obligations according to the contract or statute that is in place. The process in insurance consists of purchasing insurance, which transfers the cost of a potential loss to the insurance company.  

Claims

A surety bond is a form of credit, so the principal is expected to pay any claims. When it comes to insurance, if a claim is paid, the insurance doesn’t typically expect to be paid back for the loss.