Differences between a Contract Surety Bond and a Traditional Insurance Policy

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People often get confused between a contract surety bond and traditional insurance policies. Although both surety bonds are oftentimes offered by insurance companies and are regulated by state insurance departments, insurance and sureties are used for different purposes. These are the primary distinctions between the two:

1. A surety bond is a prequalification and does not presume losses in its pricing, but insurance anticipates accidental losses and spreads them among larger groups of similar risks.

2. A surety bond involves 3 parties and the surety company bears the risk, whereas insurance has only 2 parties involved and the risk is transferred to the insurer.

3. The coverage in a surety bond is generally project specific, but the coverage in insurance is usually term specific and renewable.

4. Surety bonds protect the obligee whereas insurance protects the insured against a risk.

5. The premium paid in surety bonds is for the guarantee that the principal will fulfill his obligation, but the premium paid in insurance is structured to cover potential loss.

6. In surety bonds, loss are not expected and the bond is provided for pre-qualification of an individual or business, but in insurance, loss is expected and the insurance rates are adjusted to cover the loss.