How Surety Bonds and Insurance Differ

by Eric Weisbrot 

In the world of business ownership, there are several responsibilities individuals have in order to keep their company operating legally, efficiently, and profitably.

Within high-risk industries like construction work, having the right protections in place can make a significant difference in being able to continue a successful run.

Both surety bonds and business insurance play a part in providing these protections, but in different ways.

To ensure your business is operating the way it should and it is safeguarded from future risks, understanding the differences between surety bonds and business insurance is essential.

Breaking Down Surety Bonds

Many business owners and consumers use the terms bonded and insured, but they are not the same. A surety bond, offered by a surety agency, is a form of protection that involves three parties: the agency offering the bond, an individual or business covered under the bond, and the entity requiring the bond. The purpose of the bond is to ensure the business owner or company is operating in line with the rules and regulations in place for the industry.

Should a customer or project owner be unsatisfied with the work performed, or if fraudulent practices take place, the surety agency pays the claim amount to cover losses incurred. Surety bonds, then, are not insurance in the traditional sense that they protect the business owner from losses or damages, but instead they safeguard those who interact with that business. In many industries, including construction, a surety bond is required as part of the licensing process.

Understanding Insurance Coverage

Business insurance is a different method of protection than a surety bond. There are only two parties involved in the transaction: the insurance company and the insured individual or business. The purpose of business insurance is to protect the company or the business owner from losses that are the result of damage, theft, or legal liability. There are several different types of business insurance, including liability, worker’s compensation, and property and casualty coverage, all which offer different levels of protection against financial loss to the owner.

Insurance is meant to offer some safety net for the business for unforeseen events. Unlike a surety bond, insurance coverage is not a mandatory part of operating a company. However, it can be a valuable investment for business owners.

Differences in Price and Repayment

Another significant difference between surety bonds and insurance coverage is the way each is priced. Surety bond costs are calculated as a percentage of the total bond amount needed, ranging between 1 and 15% for most business owners. The percentage ranges because surety agencies take a close look at the potential bondholder’s financial history and credit report to determine risk. If an individual has a lackluster credit history, the bond will cost more. Surety agencies consider financial factors in calculating the cost of a bond because if a claim is successful, the agency pays for losses and then expects repayment from the bondholder. In this sense, a surety bond is a form of credit extended to business owners.

Insurance pricing does not have as much to do with financial history. Instead, insurance providers determine the cost of a policy based on other risk factors, including past claims history against other insurance policies, the amount at risk, and the type of coverage requested. When businesses are in high-risk industries, the cost may also be negatively impacted. However, unlike surety bonds, insurance benefits that are paid out due to loss or damage do not need to be repaid over time.

Which is Best for Your Business?

For business owners in many different industries, a surety bond is a requirement to operate legally. Insurance, on the other hand, is an option for most. Be sure to check with your state or city to see what surety bond requirements are placed on your business, and work with a surety agency that is knowledgeable about those requirements to ensure you have the right coverage. For insurance needs, consider the risks you take on in doing business each day. This will dictate your need for insurance coverage and the amount you will want to put in place.

Taking these small steps to protect your business reduces some of the risks you take on helping customers and clients.

About the author: Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

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