When you are looking at surety bonds vs. insurance policies it is crucial to understand the differences between the two. Oftentimes, surety bonds are called “surety bond insurance,” which can make things confusing. Not to mention, businesses or individuals are often required to hold both types of coverage. Contractors can easily have the lines between insurance and bonds blur. Continue reading to understand the difference.
Key Differences Between Surety Bonds and Insurance Policies
There are a few key differences between surety bonds and insurance policies. These differences include the overall functionality, parties involved, who is protected, what risk is managed, handling of claims, cost, and premiums. Although the reason people need to be bonded or insured is similar, the protection provided by each is distinct. Here is how each of these aspects differs between the two contracts.
I. Functionality
One of the main differing factors between surety bonds and insurance policies is the way each function. Fundamentally, the two contracts are very different. To confirm you are properly insured, you have to know whether you need to be bonded, insured, or both.
What is a Surety Bond & How Does it Work?
Surety bonds are contracts between three parties rather than two. It covers the person doing the work, the person requesting the work, and the party providing the bond. This kind of agreement guarantees that a contractor will complete the job. If they fail to do so, a claim against the bond can be filed to recover losses.
How Does an Insurance Policy Work?
Similarly, an insurance policy is a form of risk management that functions as a contract between a person (or business) and the insurance company. Any time an insured loss occurs, the insurance company agrees to cover the cost.
II. Parties Involved
Now that you know the basics of what sets an insurance policy apart from a surety bond, let’s get into the people they serve. Contracts typically happen between a business and workers, companies providing services, etc.
Who is Involved in a Surety Bond?
As mentioned above, surety bonds involve three parties. Surety bonds are between the principal or person doing the work, the obligee or person requiring the work, and the company providing the bond or surety.
Who is Involved in an Insurance Policy?
An insurance policy, on the other hand, only involves two parties: the person or business and the insurance company. As stated above, the insurance company is on the hook to cover losses the person or business is insured for.
III. Protection
Before applying for and obtaining a surety bond or insurance, you should know what kind of protection each offers. The protection offered with surety bonds vs. insurance is one of the most obvious differences between the two coverages.
Who is Protected with a Surety Bond?
When a claim is made, a surety bond protects the obligee who was contracted to perform work. The company providing the bond offers protection in the form of reimbursement to the principal when a claim is made against the obligee, as the roles are explained above.
Who is Protected with Insurance?
Insurance protects the person with the policy, individual, business owner, professional, homeowner, etc. from a financial loss. Usually, these claims cover accidents or unforeseen events. When a claim is made, the insurance company will pay out to help recover from the loss.
IV. Risk Management
Another key factor that sets a surety bond apart from an insurance policy is how the risk is managed. Even though insurance companies often write up surety bonds, an insurance policy and bond work in very different ways.
Who Assumes Risk with a Surety Bond?
Surety bonds will pay the cost of the claim, but the principal or person who purchased the bond is expected to reimburse them for the cost. In many ways, it works like a line of credit. The company or individual essentially borrows the money to cover the claim and pay it back. So, the risk lies with the person or individual buying the surety bond.
Who Assumes Risk with Insurance?
With an insurance policy, the insurance company assumes the risk. The business or individual insured under the policy usually pays very little, if anything at all, when a claim is made. All of this has an impact on the monthly premiums charged to be bonded or insured.
V. Premiums
Premiums are structured differently for surety bonds and insurance policies. Generally speaking, insurance companies don’t expect losses so premiums are higher. Surety bonds, on the other hand, only accept low-risk contracts. So, the premiums aren’t as high. Here’s a look at how premiums work for each.
How Does a Surety Bond Premium Work?
Bond premiums are a bit more difficult to figure out. The financial strength of the person or business purchasing the bond is taken into consideration as well as the size and type of bond. Surety bonds prices are driven by a number of factors. Some principals may be more likely to have claims made against them, making them at higher risk. Your credit score also comes into play when determining a surety bond premium.
How Does an Insurance Premium Work?
Premiums for insurance policies are usually calculated against the value of the insured asset. It can also be calculated against the size of the policy. The risks involved in the type of insurance being purchased are also taken into consideration. These may include activities the insured parties take part in or the type of business they run.
VI. Handling of Claims
Any time a claim is made, a surety bond or insurance policy does what it’s meant to. It protects you or your business from financial loss. Because different parties assume the risk, the way you handle a claim with an insurance policy vs. a bond looks quite different.
How are Claims Handled with a Surety Bond?
If a claim is filed against the bond, the obligee and principal both work with the surety company. Once the claim is confirmed to be legitimate by the surety company, the principal is given time to respond by either resolving or defending the claim. If the obligee’s claim isn’t satisfied, the surety company then takes the necessary steps to resolve the issue. The principal is expected to pay for all the expenses, including the investigation portion of the claim.
How Do Insurance Claims Work?
Insurance companies will also investigate when a claim is made. When it is determined that the claim is a loss covered under the policy, the company reimburses the insured individual or business. There is no expectation that the individual(s) covered pay the insurance company back for anything covered in the claim.
VII. Cost
Many businesses need to be bonded and insured. To manage costs, it is good to know what the average price of a surety bond or insurance policy is.
What is the Cost of a Surety Bond?
In general, a surety bond will cost between 1% and 15% of the bond. If you have to provide a $20,000 surety bond for a job and you had a bond rate of 5%, you would pay $1,000. Again, with a bond, the principal still accepts all the risk. So, if a claim is made against the bond, you could still be on the hook for the full amount of the bond.
The overall cost of a surety bond can be reduced by working with the right company. You need to identify a surety company that can write all of the bonds you need. This way, you won’t have to spend more money outsourcing specific bonds. Working on your credit can also help you reduce the cost of your bonds. If you have bad credit, you will pay a higher percentage on your bonds. Avoiding claims on your surety bonds will also help you save.
What is the Cost of an Insurance Policy?
The average cost of an insurance policy varies widely based on the industry you are in or what you are insuring. Policies range from a few hundred dollars a year to thousands. This is a premium paid monthly, but the insurance company assumes all of the risks in the agreement. So, when you have to file a claim against your $20,000 insurance policy, the company pays out and nothing further is expected from you.
How to Get Bonded and Insured with Odell Studner
Many bonding insurance companies can provide surety bonds and insurance. However, it is key to know exactly what kind of coverage you need. You want to ensure you are working with the right surety bond partner for your company. The surety bond company you choose should be able to write all of the bonds you need. They should also be able to make the process easy for you and take the hassle out of everything.
That’s exactly what the local insurance brokers at Odell Studner can do for you. We can help you get bonded, insured, and protect your business in no time. Contact us to learn more about how we can assist you.
r