Depending on the industry, companies may need either a surety bond, certificate of liability insurance, or both to engage in business or meet contractual obligations. A surety bond and certificate of liability insurance serve two different purposes. The only similarity between the two is that businesses pay the premium to have either of them in effect.
Failing to maintain either may be detrimental to your company so it is important that you understand the difference between a surety bond versus an insurance policy.
A surety bond guarantees that your company will meet its legal and contractual obligations. State and federal law often require a surety bond as a condition for obtaining a license to lawfully conduct business. For example, some states require all licensed contractors to obtain a surety bond to compensate anyone who suffers damages caused by the contractor’s violation of the state licensing law. Construction companies working on public work projects may be required to obtain a performance bond that ensures completion of the project.
General liability insurance protects your business from losses due to negligence that damages property or individuals. The type of losses your company is protected from depends on the policy language but, in general, include medical expenses, property repair or replacement and the expenses incurred in defending a lawsuit. It’s often a contractual requirement to have sufficient general liability insurance, even when it’s not required, as a smart business practice.
The lease for your company’s principal place of business may require your company to purchase minimum insurance coverage protecting the lessor as well as your company. As proof that your company has complied with this requirement, insurers provide a certificate of liability insurance to give to the lessor as a summary of your company’s liability insurance coverage.
Surety Bond vs. Insurance Policy
A surety bond is only needed when a business activity requires a guarantor. The premium charged for a surety bond is to cover the surety company’s services related to issuing the bond. You will be expected to perform the obligations guaranteed by the bond, and it does not pay losses when the bond is issued. Whereas with an insurance policy, you can expect company losses to be covered and premiums are determined by the losses the insurer expects to pay for the liability risks associated with your company’s industry.
Your business should always have a general liability insurance policy in effect to guard against a potential financial ruin, regardless of whether your company has a contractual obligation to provide a certificate of insurance. A surety bond will require adequate due diligence to determine if your company has the financial ability and business reputation that indicates it will perform its legal and contractual obligations.
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.