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What Is The Difference Between A Surety Bond And Insurance?

November 13, 2021

Is surety bond the same as insurance?

No! They sound alike but they are very different. The most common misconception about surety bonds is that it's the same as insurance. Another common misunderstanding is that a surety bond is not required for people who have good credit or a history of making regular payments. Let's look at what a surety bond and insurance actually do and how they're different from each other:

What Is A Surety Bond?

A surety bond isn't really a "bond" in the sense that you might think of buying an actual house or car with one. Instead, it's a financial contract between three parties where two agree to be responsible for the third if they fail to follow through on their obligations. In short, it allows for something to happen that couldn't easily happen without one.

What Is An Obligee?

An obligee is a person or business that needs something done and purchases a surety bond to cover their risk of loss if the other party fails to fulfill their end of the transaction. For example, an insurance company might purchase a surety bond before hiring someone to give driving lessons. Without it, they'd be taking on too much risk by hiring an individual who may not complete training sessions with every student. The surety bond provides them with some protection should this occur.

Is a surety an insurance company?

Not necessarily. Surety bonds are actually written by insurance companies, but there's no requirement that they are the same company. So while some surety bonds might be underwritten by an insurance company, others could be issued by a bank or any other business with enough financial resources to provide protection for its customers.

A surety bond company is different from an insurance company. They are not the same thing. The primary difference lies in their business model. Insurance companies make money by collecting premiums based on a statistical analysis of what will happen during a certain period of time, i.e., they charge customers more to cover for claims that are likely to be made than those less likely to occur. 

Far fewer people file claims under a surety bond contract compared with an insurance policy, which means that even if one does become necessary you might end up paying more out-of-pocket since there are fewer assets available to pay the claim with.

In what ways are surety bonds not like insurance policies?

Surety bonds are not considered insurance policies. Rather, they are more like performance guarantees since unlike insurance, you're required to have one for many types of transactions. There are several major differences between them including who underwrites the bond and how much it costs to purchase on.

A surety bond functions through what is called indemnification or contractual liability protection. This means that if someone fails to fulfill their end of the contract and causes damage in the process that's covered by your agreement, then you can turn to your surety company for compensation. This is why it's important to choose a reputable one when purchasing your bond; otherwise, you may end up with little to no recourse should the other party default.

It's important to remember that a surety bond contract is not an insurance policy. That means the two have very different purposes and work in different ways, so they're not interchangeable. 

For example, an insurer has access to assets that can be liquidated when necessary, while a surety only has the ability to collect from its contracted parties or refer them to collections agencies if necessary. This means that even if you have good credit there's no guarantee the obligee will be able to pay for your failure, whereas if you file an insurance claim it'll likely result in reimbursement.

Is a surety bond better than insurance?

Not necessarily. Surety bonds are actually written by insurance companies, but there's no requirement that they are the same company. So while some surety bonds might be underwritten by an insurance company, others could be issued by a bank or any other business with enough financial resources to provide protection for its customers.

Surety bond companies are definitely different from insurance companies. They are not the same thing. The primary difference lies in their business model, which is a major element of who underwrites the bond and how much it costs to purchase one. Insurance companies make money by collecting premiums based on a statistical analysis of what will happen during a certain period of time, i.e., they charge customers more to cover for claims that are likely to be made than those less likely to occur. 

Far fewer people file claims under a surety bond contract compared with an insurance policy, which means that even if one does become necessary you might end up paying more out-of-pocket since there are fewer assets available to pay the claim with.

What makes a surety bond different from insurance?

Surety bonds are not considered insurance policies. Rather, they are more like performance guarantees since unlike insurance, you're required to have one for many types of transactions. There are several major differences between them including who underwrites the bond and how much it costs to purchase on.

A surety bond functions through what is called indemnification or contractual liability protection. This means that if someone fails to fulfill their end of the contract and causes damage in the process that's covered by your agreement, then you can turn to your surety company for compensation. This is why it's important to choose a reputable one when purchasing your bond; otherwise, you may end up with little to no recourse should the other party default.

Check out Axcess Surety Bonds to know more!

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