• September 21, 2017

The Real Difference Between Surety Bonds and Commercial Insurance?

The Real Difference Between Surety Bonds and Commercial Insurance?

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Many people do not understand the difference between surety bonds and commercial insurance. While the two do share some similarities, there are glaring differences that must be noted and understood in order to decide which one (or both) are right for your specific situation.

Here are the basic definitions and major differences between commercial insurance and surety bonds.

Commercial Insurance

Commercial insurance is the more generally understood term. From auto to home/renters and medical, most people have used insurance as some type of protection throughout their lives.

Insurance is simply an agreement between two parties: the insurer and the insured. The insured party agrees to pay a premium to the insuring party, who agrees to compensate the insured party in the event of a specified loss, damage, etc.

Commercial insurance follows this general layout and can come in the form of liability insurance. With liability insurance, insured businesses pay insurance companies a premium to protect themselves from the risk that they may be sued or held liable for some type malpractice, injury, negligence, etc.

There are many forms of commercial insurance that include:

  • Property & Commercial Liability Insurance
  • Commercial Umbrella Insurance
  • Commercial Auto Insurance
  • Workers’ Compensation Insurance
  • Directors & Officers Liability Insurance
  • Errors & Omissions Insurance
  • ERISA Bond
  • Malpractice Insurance
  • Employer’s Liability Insurance

You can learn more about these types of commercial insurance here.

Surety Bonds

Surety operates in a similar fashion to commercial insurance in that it provides protection for a party against loss. The primary difference is that the party that is protected assumes none of the risk. Surety is arranged between three parties: a principal, obligee and a surety. Under this setup, the principal (who obtains the surety bond), pays the surety company (who provides the “insurance”) a set price for the bond. Unlike commercial insurance, the party paying for the bond does not receive the protection. Instead the bond protects the third party, the obligee.

Consider this example: an electrician is hired by a person to complete a job at their home. In most states, electricians are required to have a special license bond. In this scenario, the person who hired the electrician is the obligee and the electrician is the principal. The electrician would be required to pay a surety company for a bond to protect the obligee, their customer. Should the obligee pay the electrician’s company for a job that they can’t complete, the surety will provide compensation to the obligee.

Essentially, surety bonds are a type of insurance that provides protection to one party (the obligee) but is paid for by a different party (the principal).

Learn more about the many different types of surety bonds here.

Which Do You Need?

If you are a business, it’s likely that you will need both commercial insurance and surety bonds. While commercial insurance will protect your business from losses, surety bonds are often required by state and federal entities as a form of protection for your consumers.

How can you obtain one? It’s always best to work with a surety agency who has experience drafting bonds and working with a variety of reliable surety companies. To learn more about the process, or to obtain a bond, contact The Patrick J. Thomas Agency today.

Disclaimer: this is for informational purposes only and is not intended to be legal advice. If you need legal counsel, please contact an attorney.