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

Risk management and loss control are critical elements of operating a business. While planning for things going wrong may not be pleasant or enjoyable, doing so is necessary to protect your company’s finances and future. Both insurance and surety bonds may play crucial roles in these efforts, potentially offsetting losses from incidents that might otherwise impose devastating fiscal consequences. Understanding how each works is essential.

What Are Surety Bonds?

Surety bonds may also be known as business bonds or bonds insurance. These financial products are often sold by insurance companies and can help compensate other parties if you’re at fault for their losses due to an inability to provide promised or up-to-standard services. Specifically, these arrangements typically entail an agreement between the following parties:

• The principal, such as your business

• The obligee, such as your client

• The surety, such as your insurance company

If you find you’re unable to fulfill your responsibilities to the obligee, they can receive compensation through surety bonds. Your company will then be responsible for reimbursing the surety.

Surety bonds may come in many forms, including the following:

• Contract bonds

• Performance bonds

• License and permit bonds

• Fidelity bonds

• Maintenance bonds

• Payment bonds

• Bid bonds

• Supply bonds

How Are Surety Bonds Different From Insurance?

Although surety bonds can offset unexpected losses, there are several key differences between their functionality and that of traditional insurance policies. One key difference lies in a surety bond’s coverage period. While insurance may remain active for a specific period, such as six months or a year, bonds are often tied to a particular job or contract with coverage ending upon completion of a project. Additionally, surety bonds can cover parties other than your own business, offering compensation to clients, customers and the general public while potentially curbing the need for costly legal battles.

We’re Here to Help

At Better Way Insurance Agency, we can help you understand your insurance- and bond-related needs and establish a network of loss control measures capable of addressing many types of incidents and subsequent losses. Contact us today to begin.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.