“Bonded and Insured” is a phrase I have often seen in advertisements for many businesses – including contractors, car sales, and cleaning services – but not one that I ever gave much thought. So, when Jim suggested I write this week’s blog on the difference between insurance and surety bonds, I thought, “Hmmm, aren’t they the same thing?” Apparently not…and I’m sure I’m not the only one surprised to learn there is a difference!
Consider this scenario: A moving company is insured and bonded – the insurance will protect the moving company if one of the vans is damaged in a car accident, but the bond will protect the customer if his belongings are not received as promised.
Okay, I was starting to see the distinction…but I wanted to be really clear. After a little more research, I learned there are 5 key differences between Insurance and Surety Bonds:
1. The Contract
Insurance: a form of risk management. It is a two-party contract between the insured and the insurance company. This contract (insurance policy) assumes a guaranteed promise that the insured will be compensated by the insurance company in the case of a covered loss.
Surety bond: a contract among at least 3 parties. It is issued by one party (the surety) on behalf of a second party (the principal). This contract guarantees that the second party will complete an obligation to a third party (obligee). If the obligation is not met, the third party can recover its losses from that bond.
Insurance: Protects the insured against a risk.
Surety Bond: Protects the obligee.
3. The Premium
Insurance: The premium paid is designed to cover the potential losses.
Surety Bond: The premium paid is for the guarantee the principal fulfills his obligation.
Insurance: Losses are expected and insurance rates are adjusted to cover losses depending on many factors.
Surety Bond: Losses are not expected so surety bonds are issued only to qualified individuals or businesses whose projects require a guarantee.
Insurance: When a claim is paid the insurance company usually doesn’t expect to be repaid by the insured.
Surety Bond: A surety bond is a form of credit, so the principal is responsible to pay any claims.
Insured and Bonded. I guess, simply stated, one part (insured) protects the business against loss, while the other part (bonded) protects the consumer from breach of contract from that business…turns out that is one pretty important phrase.