Many people are confused between surety bonds and insurance. However, these two policies vary significantly. So, let’s define these two by pointing out their differences and similarities.
Insurance contracts include the insurer and the insured. The insured is a company or an individual. Getting insurance is an option.
Usually, businesses avail of surety bonds as part of a requirement. A surety bond involves three parties:
- Principal – person/company who fulfills an obligation
- Surety – independent company (e.g., MD Surety Bonds) that guarantees the obligee
- Obligee – person/company that needs the guarantee and expects the principal to fulfill an obligation.
Generally, the surety bond arises when you enter in a contract with government agencies. It is often required in construction contracts that have high stakes to ensure delivery of quality output.
An insurance policy is either non-life or life insurance coverage. It often protects the insured against possible losses and is often a part of a risk management strategy.
You can ensure a valuable asset (such as a building) or a regular employee. With insurance, you can protect your asset against fire, theft, robbery (in case of cash), and other fortuitous events.
Insurance may cover the following:
- Personal Insurance (commonly known as life insurance)
- Social Insurance
- Property Insurance
- Guarantee Insurance
- Marine Insurance
- Fire Insurance
- Liability Insurance
A surety bond protects the obligee from non-fulfillment of obligation. If the principal fails to deliver the terms in the contract, the surety will pay the obligee’s financial losses. In effect, a surety bond is part credit and part insurance.
What are the kinds of surety bonds?
- Contract Surety Bond – popular with construction contracts
- Commercial Surety Bond – a requirement for some business industries such as liquor companies
- Fidelity Surety Bond – recommended for companies with employees who handle cash
- Court Surety Bond – required for court proceedings.
In an insurance policy, the premium payment is either monthly, semi-annually, or annually. The premium often covers the potential losses an insured may suffer in the future. A higher premium means a more comprehensive coverage.
The surety bond is computed on a percentage of the working capital, business equity, or total bond amount. Some will use a credit score to calculate the amount of bond. A high credit score equals a lower surety bond.
Aside from the bond’s cost, you pay legal fees if you fail to fulfill the contract’s obligation.
Insurance can be a form of investment for the insured. Some insurance companies offer policies that have investment-related aspects (which is common to life insurance). You may or may not earn from these investments.
A surety bond is not an investment, definition-wise. You don’t get anything in return in monetary value or a return of investment (ROI). Instead, the bond serves as a deterrent to non-fulfillment.
The assurance of fulfillment is your “implied” investment in the contract. The amount you paid for the surety bond is the amount (more or less) you receive when the contract ends.
In insurance, always expect potential losses. Also, insurance companies compute insurance rates based on many factors.
Losses don’t occur in a surety bond contract, whether the principal delivers the required expectations on output or not. In the case of failed obligation, the principal pays whatever claims arise.
The insurance company never expects repayment of claims. Instead, they obligate the insured to continue paying the existing premium on an insurance policy.
Since a surety bond is part credit, you (as the principal) have to pay for any claims for non-fulfillment. These claims may include court fees, surety fees, among others.
Generally, insurance policies don’t expire as long as you pay the premium required for a given year. An alternative expiration is a retiring age you indicated in the contract.
A surety bond has an expiration date that ranges from several months to years. The expiration of some surety bonds may also depend on the contract terms.
Insurance and surety bonds are contracts made between parties. These contracts involve a specific amount of premium to pay and terms to follow. If you want to know more, please don’t hesitate to contact us. We have experts who can discuss the intricacies of each service.
About Moody Insurance Worldwide
Moody Insurance Worldwide, a division of Moody & Associates that was founded in 1914, is a leading provider of risk management programs and insurance coverage to individuals and businesses across the East Coast. We write all sizes of businesses, with technical expertise in many key industry areas, and provide personal insurance programs for estates and high net worth individuals. Our licensed, experienced commercial account managers can work with you to determine the coverage that you need at a competitive rate. Contact us today at (855) 868-0170 to learn more about what we can do for you.