Surety Bond vs. Business Insurance: What’s the Difference?
What Is the Difference Between a Surety Bond and Business Insurance?
The key difference is who is being protected and what obligation the financial product is designed to address.
Protects the Insured Business Against Covered Losses
Commercial insurance may help protect the business against qualifying property damage, lawsuits, employee injuries, vehicle accidents, professional claims, cyber events, and other insured exposures.
Guarantees an Obligation to Another Party
A surety bond generally guarantees that the bonded business will satisfy a specific contractual, licensing, payment, performance, or other obligation described by the bond.
A Surety Bond Usually Involves Three Parties
Unlike a typical insurance relationship between an insured and an insurance company, a surety bond generally includes the business obtaining the bond, the party requiring it, and the surety company providing the financial guarantee.
The principal is generally the business or individual required to obtain the bond and perform the obligation being guaranteed.
The obligee is the government agency, project owner, customer, or other organization requiring the bond.
The surety is the company that issues the bond and may respond to a valid claim according to the bond’s terms.
Depending on the bond and indemnity agreement, the principal and other indemnitors may be responsible for reimbursing the surety for qualifying losses, expenses, or claim payments.
Why Can a Business Need Both a Bond and Insurance?
A bond may satisfy a licensing or contractual obligation while business insurance protects against separate operational risks. One generally does not replace the other.
State or local authorities may require certain businesses to maintain a bond as a condition of licensing, registration, or operating authority.
Customers, project owners, landlords, or other organizations may require a bond and separate insurance policies as part of the same contract.
General Liability, Commercial Auto, Professional Liability, Workers’ Compensation, and other policies may still be needed to address exposures that are not the purpose of the bond.
A bond amount represents the financial limit of the bond obligation, while an insurance limit applies according to the separate insurance policy and should not be treated as the same type of protection.
Does Your Business Need a Surety Bond, Insurance, or Both?
Best Formula Insurance can help businesses review surety bond requirements, bond types, bond amounts, General Liability, Commercial Auto, Workers’ Compensation, Professional Liability, and other commercial insurance needs.