So, McConkey Insurance & Benefits… where does Surety Bonding fall? Well, it is a division all its own. Why? Because contrary to popular belief, surety bonding is not insurance. What are the differences?
Three vs. Two Party Deal
When it comes to Surety, it’s a three-party deal:
- Obligee (Project Owner) – The entity or person protected by the bond
- Principal (Contractor) – The persons who obtains he bond
- Surety (‘Insurance’ Company) – The entity that backs up the Principal and allows the bond to be issued
Whereas insurance is a two-party deal:
- Insured – Person protected by Insurance Policy
- Insurer – The entity that provides the insurance policy
Surety bonds are underwritten assuming that a loss will not occur. Insurance companies underwrite policies in anticipation of expected losses.
Once a surety company agrees to write a bond, an indemnity agreement is signed and the bond is purchased. At that point, you’d enter a contract with the surety and are expected to fulfill your obligations according to the contract or statute that is in place. The process in insurance consists of purchasing insurance, which transfers the cost of a potential loss to the insurance company.
A surety bond is a form of credit, so the principal is expected to pay any claims. When it comes to insurance, if a claim is paid, the insurance doesn’t typically expect to be paid back for the loss.