So after I started underwriting surety bonds I have had a few questions regarding the difference between an insurance policy and surety bonds. If I didn't deal with bonds myself I would probably be a little confused by the differences or similarities between an insurance policy and surety bonds too. The two seem similar but have different implications for businesses and consumers.
Lets get to the basics first;
What is a Surety Bond?
A surety bond is an agreement where the surety (either an insurance company or a bank) agrees to pay claims made against a bond. It might sound like your normal insurance but there is a difference. The purchaser of the bond cannot make a claim against the bond unlike an insurance policy where the purchaser makes the claim. Surety bonds are normally required by different organisations as part of licensing application processes, funding processes and contract requirement processes.
We can now take a look at Surety Bonds vs Insurance
Which parties are involved?
Lets get to the basics first;
What is a Surety Bond?
A surety bond is an agreement where the surety (either an insurance company or a bank) agrees to pay claims made against a bond. It might sound like your normal insurance but there is a difference. The purchaser of the bond cannot make a claim against the bond unlike an insurance policy where the purchaser makes the claim. Surety bonds are normally required by different organisations as part of licensing application processes, funding processes and contract requirement processes.
We can now take a look at Surety Bonds vs Insurance
The major difference between surety bonds and insurance is the parties involved.
Insurance policies have two parties that is the insurance company and another party.
Surety bonds have three parties, that is the surety company (insurance company or bank), the principal (sometimes refereed to as the contractor who is the business or individual purchasing the bond) and the obligee (who is the beneficiary or organisation requiring the bond)
Who is protected?
Insurance policies protect businesses and individuals from covered losses. This means that businesses and individuals make a personal choice to purchase insurance in order to protect themselves.
Surety Bonds on the other hand protect the obligee against breech of contract. The surety company (insurance company or bank) compensates the obligee if the principal fails to meet agreed terms on a contract.The purchaser of the bond (principal) is not protected.
Who covers the losses?
In insurance policies the insurance company absorbs the whole financial loss except a small portion which is absorbed by the business or individual (called an excess)
With Surety Bonds however, once a claim has been paid fully to the obligee by the surety company, the surety should be reimbursed by the principal who purchased the surety bond.
What are the costs involved?
Insurance costs are calculated against the value of an asset insured. Risks are also a contributing factor in calculating the premium amounts.
Surety bonds premiums are calculated by size of the bond. Also certain types of bonds carry a higher risk more than others which means they attracted a higher premium.
Zimnat originally known for providing all types of insurance has opened a dedicated division which provides both insurance and bank issued bonds and guarantees. Contact them to find the best prices on bonds.