If you own a business, you’ve likely heard the phrase, “bonded and insured.” And you may also have wondered what the differences are between being insured and having a surety bond. Many think they’re the same thing, but they’re not. Here are the main differences between being bonded and being insured:
Contract: Insurance is about managing risks. The contract is between the policyholder and the insurer, and essentially “guarantees” that the insured will receive compensation from the insurance company if a loss occurs, providing it is covered under the contract (policy).
A surety bond includes at least three parties: the “surety” or “guarantor” (which is in most cases is an insurance company), the principal (a second party that promises to do contracted work), and the “obligee” (a third party for whom the work is to be done.)
Type of protection: Insurance protects an insured business against certain risks, whereas a surety bond provides protection for the obligee of the bond. For example, if a business hires a bonded contractor to perform office renovations, and the contractor doesn’t fulfill the agreed-upon terms of the contract, the surety would pay the business owner – the obligee. Even if the contractor is insured and bonded, if there is a failure to perform the work, the insurer wouldn’t pay the business owner; the guarantor or surety is responsible.
Premiums: Insurance premiums are paid to cover a potential loss, whereas the premium paid for a bond is for guaranteeing that the person promising to fulfill contractual obligations, does so.