The insured may be responsible for a deductible in the event of a loss, but does not have to reimburse the insurance company for the full loss incurred. The risk of financial loss is transferred from the insured to the insurance company. When a surety bond is issued, a premium or service fee is paid by the principal to the surety company.
The service fee allows the principal to use the financial backing of the surety company. If there is a loss, the surety company pays for the loss, but requires the principal to reimburse all funds that have been paid out. In contrast, a premium is paid by the insured to the insurance company for an insurance policy. In return, the insurance company promises to protect the insured from financial loss.
In summary, while bonds are useful for providing protection for a customer and may be required for some contracts, it is important to understand the key differences between a bond and an insurance policy. At Pioneer Business Insurance Agency, we work hard at being accessible, helpful, and result-oriented.
Learn more about us at PioneerBusinessInsurance. How can we put our expertise to work for you? We look forward to meeting you! Listen to Podcast. There are four types of surety bonds: Bid bonds, i. I promise to stick to the price I bid on the project. Performance bonds, i. I promise to fully complete the project.
Payment bonds, i. I promise to pay my suppliers. Ancillary bonds, i. I promise to fulfill a specific non-performance related obligation stated in the contract. Start Here. 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:. 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. The transfer of risk and charging of premium to do so is about the extent of the similarities between insurance and surety. The most fundamental difference between surety bonds and insurance policies is the type of risk that is transferred to the carrier.
Insurance takes on the risk of unpredictable events that may or may not occur, such as your house burning down. While surety bonds take on the risk of defined performance that actually should occur. EXAMPLE: Money transmitters the principal — companies that electronically move money from one party to another — are required to post a surety bond to obtain a license by most states the obligee to be able to operate in their area.
These state laws and regulations are in place to ensure that when a state resident uses a money transmitter to pay a bill or give someone cash, that service performs accordingly. Another fundamental difference between insurance and surety is what happens if the risk being covered actually takes place. Despite our best efforts, unpredictable calamities happen.
You have a car wreck, someone steals your jewelry, a dog bites the mailman.
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