Surety bond vs Insurance: What’s the difference?
For many businesses, both surety bonds and insurance are needed for obtaining license, or to be in compliance with local laws. So what’s the difference? Simply put, insurance protects a business against loss, while a surety bond protects a third-party from a breach of contract from said business.
Here are some of our most commonly asked questions – with answers for you!
How does it work? A surety bond is a third-party guarantee that a business will meet their legal and contractual obligations. It is guaranteed by a bonding company on behalf of the issuer, but does not protect the purchaser of the bond; it is similar to co-signing on a loan. The bonding company guarantees that the business will fulfill their obligations. Insurance is a two-party agreement, where the risk is transferred from the insured to the insurance company.
How do I know if I need a bond? If you are completing a large scale construction project, especially any kind of public works project, it is likely that you will be required to obtain a bond guaranteeing completion of the project. While surety bonds are most common in the construction industry, customers can acquire bonds for a variety of reasons including licensing, utility deposit, tax guarantees, court bonds (probate and appeal), and Contractor’s Performance and Payment Bonds. The contractor bonds specifically are required on all public construction projects. A Performance Bond guarantees the completion of a project according to the terms outlined in the contract.
What should I look for when selecting a surety agent? There are two aspects you need to evaluate before you hire any surety agent. First, they must possess the knowledge to be your business partner by providing you with advice, suggestions and feedback on many aspects of your business. This would include accounting, operations, internal controls, business perpetuation and more. Their knowledge ensures you will be properly represented as the agent seeks surety support on your behalf in the market.
Second, because every surety is different, your surety agent must have detailed knowledge of the various surety markets. A knowledgeable surety agent with strong connections across multiple markets will be able to match you to the best surety partner for your required bond needs.
There are four things you should do when interviewing a potential agent:
- Ask them about their relationships within their surety markets.
- Test their accounting and business law skills.
- Obtain a list of client contractor referrals.
- Ask your other valued business partners (such as your attorney, banker, or CPA) about the agents you are considering.
How is bond eligibility determined? A company’s bond eligibility is based on its solvency and project history. A bonding company will go over the applicant’s financials and credit report, banking financials, and history of project completion to determine eligibility.
How does surety pricing work? It depends on the situation and many factors affect pricing. If you upgrade your financial statement presentation as part of the bonding process, it may affect your rates favorably. A new company may have more challenges acquiring rates than a more established one. The quality of your agent is also an important factor. An agent who has good working relationships with markets will be more likely to place you in a better market.
What happens if a claim is filed against a surety bond? Depending on the type of bond in question, the bonding company will either pay the bill, arrange for the completion of the project or provide payment of suppliers. Unlike insurance, the bonding company will then seek compensation from the corporate and personal assets of the bonded company.
For more stories, please visit our news section: In The News.
More questions on assessing your surety team can be found here: http://trussadvantage.com/our-services/surety-bonds/