Surety Bonds vs. Insurance: What’s the Difference?

Table of Contents

What you can find on this page What Is a Surety Bond?What Is Insurance?Surety Bond vs. Insurance: Key DifferencesWho Pays and Who’s Protected?RepaymentScope of CoverageClaim TriggersForms and CustomizationWho Assumes the Risk?Surety Bond Premiums vs. Insurance PremiumsAre Surety Bonds Paid Monthly?Do You Need a Surety Bond or Insurance?

When navigating risk management for your business, it's common to come across both surety bonds and insurance. Although they might appear alike, both requiring premium payments and offering financial protection, they differ significantly in purpose and the parties involved.

This guide will walk you through the key differences between surety bonds and insurance, helping you understand which is needed and when.

What Is a Surety Bond?

A surety bond is a legally binding agreement between three parties:

• Principal - the party required to get the bond (usually a business or individual)
• Obligee - the entity requiring the bond (often a government agency or client)
• Surety - the company that issues the bond and guarantees the principal’s performance

The purpose of a surety bond is to guarantee that the principal will fulfill certain obligations - such as following licensing laws, completing a contract, or complying with regulations. If the principal fails, the obligee can file a claim. The surety will pay the claim, but the principal is legally required to repay the surety.

For a more detailed explanation of what surety bonds are and how they work, see our ‘What is a surety bond’ guide.

What Is Insurance?

Insurance is a two-party agreement between:

• The Insured - the policyholder
• The Insurer - the company providing financial protection

The insured pays premiums, and in return, the insurer covers specific risks or losses (e.g., property damage, liability, or injury). If a valid claim arises, the insurer pays out according to the policy - without requiring reimbursement from the insured.

Surety Bond vs. Insurance: Key Differences

Surety bonds and insurance are often confused - both involve managing risk and financial protection. It's common to hear that a business is "bonded and insured," but each serves a different purpose:

• Being bonded protects your client or the hiring party.
• Being insured protects your business from financial losses.

Who Pays and Who’s Protected?

• Surety Bonds: The surety company may pay a claim, but you (the principal) must pay them back. Bonds guarantee your obligation to another party - usually a government or client.
• Insurance: The insurer pays claims directly and doesn’t expect reimbursement. Insurance protects your business from covered losses.

Repayment

• Surety Bond Claims: Must be repaid in full. Think of it like a temporary loan - the surety fronts the money but you remain liable.
• Insurance Claims: You don’t repay the insurer. Once they pay, the matter is resolved (within policy terms).

Scope of Coverage

• Insurance: Covers a broad range of risks - like general liability or property damage - often under one policy.
• Surety Bonds: Each bond is specific to a particular license, contract, or obligation. A single business might hold multiple bonds for different purposes.

Claim Triggers

• Insurance: Claims are triggered by actual damage, injury, or financial loss.
• Surety Bonds: Claims are triggered by failure to fulfill an obligation, even if no damage occurs - like not completing a job or not paying subcontractors.

Forms and Customization

• Surety Bonds: Often use standard forms set by government agencies or industry regulators.
• Insurance Policies: Typically tailored to your business, with options to exclude or include certain risks.

Who Assumes the Risk?

This is a critical distinction between surety bonds and insurance:

• Surety Bonds: You (the principal) assume the risk. If the surety pays out, you're legally required to reimburse them.

  • Example: A contractor fails to complete a bonded project. The surety pays the client but then seeks repayment from the contractor.

• Insurance: The insurer assumes the risk. If a covered loss occurs, the insurer absorbs the financial impact.

  • Example: A customer slips and falls at your business. Your general liability insurance covers medical costs and legal fees - no repayment required.

Surety Bond Premiums vs. Insurance Premiums

Both products require paying a premium - but how and why they’re paid is very different.

• Insurance Premiums:
  Paid monthly or annually. They go into a shared pool to cover future claims from all policyholders.
• Surety Bond Premiums:
  Paid once, upfront (typically annually). The premium covers the cost of underwriting and the risk the surety is taking on - it does not fund claims.

Are Surety Bonds Paid Monthly?

No. Surety bonds are generally purchased with a one-time payment that covers a 12-month term. Unlike insurance, there’s no monthly installment option unless arranged with the broker.

Do You Need a Surety Bond or Insurance?

The answer depends on your business and the requirements of your industry or contracts:

• You need a surety bond if a licensing agency, client, or government entity requires one.
• You need insurance to protect your own business against financial loss from covered risks.

In many cases, businesses need both to operate legally and protect themselves and their clients.

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