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3 Major Differences Between Surety Bonds And Insurance

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In the event that something goes wrong in the course of a business day, you want the reassurance that comes from knowing you are protected against financial risk. There are two primary products that businesses can utilize to minimize risk. These products are surety bonds and insurance policies.

Making the distinction between these two protective products can be challenging. Identifying three major differences between the two will help you better determine which is suited to meet your company's protection needs in the future.

1. Parties Involved

One of the primary differences between surety bonds and insurance policies are the parties involved in each of these types of agreements.

An insurance policy is an agreement between you and an insurance company. A surety bond is a three-way agreement between the obligee (the person, agency or entity requiring the bond), the principal (you), and the surety (the company providing the surety bond services).

Understanding the various parties that are involved in both insurance policies and surety bonds will help you see which product will best protect your company in the future.

2. Expectation of Loss

Another key area in which insurance policies and surety bonds differ is when it comes to the expectation of loss.

An insurance policy typically assumes that a loss will occur. You pay monthly premiums for the privilege of being protected under an insurance policy, and these premiums are used to help offset the costs of covering any losses that must be reimbursed after a claim is filed.

A surety bond, on the other hand, makes the assumption that no loss will occur. The fees that you pay for a surety bond are used to cover the cost of underwriting. These fees can be compared to the interest that you pay on a bank loan -- a fee for borrowing coverage, not for covering losses.

3. Financial Responsibility

The third major difference between an insurance policy and a surety bond is the party responsible for covering the financial costs associated with a claim. When you make a claim against an insurance policy, the insurance company is financially responsible for the associated costs.

Claims that are made against a surety bond will initially be covered by the company which extended the bond, but the full amount of the claim must be repair to the surety company by the principal.

Insurance policies and surety bonds can both provide valuable financial protection for your company. Make sure that you understand the differences between these two products so that you can secure the coverage that will maximize your protection against financial risk in the future.