Surety Bond vs Insurance
What is the difference between being Bonded and Insured?
With insurance, a person is required to pay an insurance premium to their insurance company which essentially transfers most (if not all) risk from the individual purchasing the insurance to the insurance company. The only similarity between insurance and a surety bond, other than their common root word, is the payment of a premium, because when a person pays a bond premium for a surety bond they (the principal) do not transfer risk to the surety, and instead the payment of claims will fall on the principal’s shoulders. When dealing with surety bonds, the protection goes to the person or entity that requires the principal to purchase the bond (the obligee).
When dealing with losses, insurance companies typically expect to make payment for a certain percentage of a given claim. However, surety companies do not expect to make such payments on claims, and instead treat the premiums paid for surety bonds as service charges. The premiums essentially authorize the principal to use the surety’s deep pockets for financial backing, which provide the required guarantee.
To sum it up, the insurance industry is built around the assumption that customers will in fact file claims, and need to use their insurance. In the surety bond industry, claims are not looked at as inevitable, but instead all parties involved do everything in their power to avoid such losses.