Surety bonds are misunderstood. Most people assume they work like insurance policies because they involve payments when things don’t go as planned. But surety bonds and insurance policies are actually very different animals.
When you find yourself explaining surety bonds to your customers, is it hard for them to grasp that surety bonds are different than insurance? We’ve been told by many of you that it is, and so we’ve compiled four key differences between the two that will help you clarify for your customers what a surety bond is—and isn’t.
Key Difference #1: The Number of Parties Involved
Insurance policies involve two parties: the insurer and the insured.
Surety bonds involve three parties:
- Principal. The party purchasing the bond (i.e. your customer).
- Obligee. The party requiring the bond, typically a government agency.
- The insurance company guaranteeing the principal can fulfill the obligations set forth in the bond.
Key Difference #2: The Protected Party
The majority of surety bonds exist to deter individuals and companies from illegal or dodgy business practices. They protect the obligee (the party requiring the bond)—and sometimes the consumer—if such odious events should occur. For example, as you’re probably well aware, some states require that licensed insurance agents obtain an insurance broker bond that guarantees you will never coerce or mislead your clients into purchasing unnecessary or inappropriate insurance products. If you were to then engage in these practices, a claim could be made against the bond.
Insurance policies exist to protect the insured from loss due to unexpected events such as accidents, medical emergencies, or natural disasters.
Key Difference #3: The Party Responsible for Claims
When a principal fails to meet the obligations of a surety bond, the surety initially pays the claim. However, and this is crucial to understand, the surety requires the principal to repay the claim in its entirety. In other words, the principal not only purchases the bond, but is also legally responsible for reimbursing the surety for any claims paid out on the bond.
When a claim is made against an insurance policy, the insurer pays the claim. The insured is not expected to reimburse the insurance company.
Key Difference #4: Expectation of Claims
Because surety bonds are primarily designed to guarantee against inappropriate conduct, they are only issued to principals who have been thoroughly vetted. Therefore, the entire surety bond transaction is approached from the angle that a claim is unlikely.
Insurance policy providers expect claims. Premiums pooled from large numbers of policy holders are structured to absorb this loss and minimize risk.
Need Help Obtaining Surety Bonds for Your Customers?
The Bond Exchange has 40 years of experience providing insurance agents with the service and expertise necessary to satisfy the surety bond requirements of their customers. Leverage our experience—and free online platform—to streamline the surety bond process. Questions? Call us at (800) 438-1162!