Many people need clarification about surety bonds vs. insurance policies. While they are similar, there are several key differences that you should know.
With insurance, the insured pays a premium to receive coverage. When a claim is filed, the insurance company will reimburse the insured. Surety bonds, on the other hand, involve three parties: the bonding agency, the obligee, and the principal.
A bond is a three-way agreement that involves the bond company, the principal, and an obligee. Unlike an insurance policy where the insured pays premiums to help offset losses, the bond company expects the bonded contractor to repay them if a claim is made. This is why an excellent surety agency does everything possible to approve bond applications and keep premium rates low.
To determine applicant eligibility and premium cost, the underwriter looks at many factors, such as credit history, years of experience, and business financial statements. Applicants with the best credit will qualify for the lowest rates and may have to pay as little as 1% of their total bond amount. However, a poor credit score or something like bankruptcy on the record will lead to higher bond costs.
While they may sound similar, surety bonds are not insurance. They offer different types of protection for different needs and are subject to a unique underwriting process. As such, they should be thought of as something other than another line of business that can easily be added to an existing book of business.
Now, what is a surety bond? A surety bond is a guarantee with financial implications involving three parties. In contrast, insurance is a contractual agreement between parties to cover specific losses.
Being bonded sends a message to your customers and governing agencies that you are trustworthy because you will pay for any damages caused by your work. On the other hand, insurance protects your business from unforeseen financial loss in exchange for a monthly premium. Insurance claims are based on the likelihood that a covered incident will occur and, therefore, take risk factors into account, such as your credit score. This is why working with a licensed surety professional who can assess your risks and help you obtain the right coverage for your business is essential.
A surety bond works differently than an insurance policy. The claims process is different, and the parties involved are a bit other too. Specifically, the bond company investigates when someone claims a surety bond. They are looking to see if the principal failed to perform the obligations guaranteed in the bond form and any other incorporated documents, which would be considered a breach of the terms of the contract.
If they find that the principal did not perform the obligations in the contract, then the bond company is expected to recoup at least part of their losses from the bonded individual or business. The premium collected for a bond covers expenses and expected losses. Insurance companies expect claims and use their underwriting process to determine which risks they’ll accept or assign a higher premium to those they will not cover. It is a less selective process than for surety bonds.
An individual must fill out a standard application to get a surety bond. The bond company will review the applicant’s credit and financial information to determine their bonding rate. In many cases, this process can be done quickly and electronically.
The bond company will then pay a claim if the principal fails to fulfill their obligation. In this situation, the principal must repay the surety company for the funds spent to pay the share.
Insurance agents are an excellent resource for individuals who need to obtain a surety bond. Agents can help clients understand the requirements and determine which bonds are appropriate for their business.
Various industries require surety bonds as part of their license and permit requirements, including auto dealers, mortgage brokers, contractors, freight brokers, and telemarketing agencies. Each industry’s licensing authority determines the specific requirements. A business can check their local licensing agency’s website for more information on surety bonding requirements.
Meg is an author at Cinnamon Hollow. She writes on a variety of topics sharing tips and ideas for daily life.