Surety bonds are an important risk mitigation instrument, but it’s important to know that surety bonds and insurance in Salem OH are two different types of tools. The terms “surety bond” and “surety insurance” are often used interchangeably, causing some confusion. It’s important to note that surety bonds are not insurance and today we’re discussing the differences.

Comparing Surety Bonds vs. Insurance in Salem OH

Surety Bonds:

  • Include the person or entity requiring the bond, the principal needing the bond and the surety company that supplies the bond;
  • A commitment by the principal is guaranteed;
  • The party the principal is doing business with or providing services for is protected;
  • The principal must cover any losses as a result of a claim.

Insurance:

  • The consumer and the insurance company are involved;
  • Coverage of losses is guaranteed;
  • The consumer buying the insurance is protected;
  • The insurance company is responsible for claims.

 There’s an important distinction to make between surety bonds and insurance in Salem OH, though it can be confusing. Surety bonds are actually a form of credit. They’re often mistaken for insurance because they sometimes involve payment when things don’t go as planned. But with surety bonds, the risk is always with the principal (the person purchasing the bond), not with an insurance company.

With most insurance policies, the risk is typically distributed among a group of similar clients. Policyholders contribute to premiums that are put in place to help cover losses. Surety bonds are three-way agreements where no loss is anticipated, and premiums generally pay for pre-qualification services and the cost of underwriting. Think of it as paying interest on a bank loan, where the interest is a fee for borrowing money and not a means of covering losses on loan defaults.

Surety Bonds vs. Insurance in Salem OH: Who’s Protected?

For example, most municipalities and governmental agencies require construction bonds on public works projects. A contractor must obtain a payment bond that guarantees subcontractors and other workers will be paid in the unlikely event the contractor defaults.

The surety bond protects the city from financial harm, but it is not insurance. If a subcontract issues a claim against the payment promise, the surety company makes sure the maligned party is compensated by the contractor who obtained the bond.

The surety bond provides protection for the project owner, but they’re not obligated financially for any premium costs or potential losses. Typically, the principal, or entity whose obligations are guaranteed by a bond, will sign an indemnity agreement that specifies he or she will repay the surety bond company if it pays out a claim.

If the principal can’t cover the payment, compensation falls to the surety company that issued the original bond. That’s a relatively rare occurrence, though, as surety companies rely on strict underwriting guidelines to identify and avoid unreliable businesses.

Surety bonds and insurance in Salem OH are two quite different risk-management tools. If you are looking for a surety bond, call our office today to speak with one of our specialists who will help you navigate the process.