Understanding the Difference Between Surety Bonds and Insurance.

• Author: Weisbrot, Eric
• Position: GUEST ARTICLE

* Businesses large and small have two main options for protection--surety bonds and insurance coverage. While some use the terms interchangeably, there are differences between the two that should be understood. Both insurance and surety bonds have unique features that fit specific protection needs, either for the business itself or for the customer. They also differ in terms of when they are needed, and how much coverage costs. Here are the ways surety bonds and insurance differ from one another.

HOW SURETY BONDS WORK

Many business owners may be aware of the concept of surety bonds, but understanding how they work in practice is not widely known. Surety bonds, offered by surety agencies or companies, provide protection to business customers through a unique framework. When a business owner purchases a surety bond, a contract is created. This contract includes three parties--the individual taking out the surety bond, the entity or individual requiring the surety bond, and the surety company backing the bond.

When a bond is in place, the entity requiring a surety bond has the opportunity to make a claim against it should the business, or bondholder, not perform in-line with certain rules and regulations. If a claim is successful, the surety agency pays up to the limits of the bond on behalf of the bondholder. Then, the bondholder is required to repay the claim amount, either in full or over time. A surety bond is a form of credit to the bondholder, but it offers protection to the entity or individual requiring the bond should things not go as planned.

HOW INSURANCE WORKS

Insurance differs from a surety bond in that it offers protection against loss directly to the business owner. When insurance coverage is purchased through an insurance agency, the policyholder gains valuable coverage that can limit financial losses due to any number of events. For instance, life insurance pays out a benefit in the event of the business owners death, while disability insurance pays a portion of wages or income when an individual is sick or injured and cannot work for an extended period. Businesses may also secure liability insurance that protects them from claims of liability from customers or other businesses.

Insurance is not a form of credit, but instead, a transfer of risk to an insurance provider. Should a claim be made and paid, there is no obligation for the policyholder to repay the benefit amount back to the insurance company. This is the most...