Are Surety Bonds Insurance?

When putting together your business’s risk management portfolio, you will naturally need to include commercial insurance as part of your strategy. However, another critical piece of financial protection that you might need is a commercial bond. Also known as surety bonds, commercial bonds are guarantees of financial security that address a business’s liabilities to its clients. However, bonds are not insurance policies, nor can you use them interchangeably.

In many cases, surety bonds are required of businesses in numerous industries, and in many cases they will be effective in helping your business grow and prosper over the years. Let’s take a closer look at the benefits of surety bonds, how they differ from insurance, and what you can do to make sure you have the right ones for your company.

What are Surety Bonds? 

When you buy a surety bond, the bond acts as a promise that you have money and can meet your obligations to others. The bond itself is essentially a document that is issued by a surety bond company, and represents that, following an unexpected problem in your line of work, your business can provide the amount of money listed in the bond to those who need such assistance.

Bonds are often required in jobs that involve services or contracting. When you become bonded, you promise clients that you will either do your work correctly, or else you will pay up. By providing the client with the surety bond, you will offer proof that you promise to do your job and have the money to pick up the pieces if something goes wrong. The surety bond company is the financial institution that guarantees that this money will be paid.

Because bonds usually pay when something goes wrong at work, many people often consider them similarly to liability insurance. After all, both might pay in situations where your issues caused others losses. However, the similarities stop there.

Why are bonds different from insurance? 

Surety bonds are part of your business’s financial security, that is true. However, they are not insurance.

Yes, bonds will represent payments to clients in case something goes wrong and you can’t deliver on your promised services. However, they do not cover these costs on your behalf, the way an insurance policy would.

If someone makes a claim on your bond, then the bond will stipulate that they will receive certain money or other tangible assets for their losses. The surety company might make the restitution on the business’s behalf. However, at that point, the bonded party (I.e. your business) will become indebted to the surety company and will have to make the appropriate repayments. Otherwise, your business will be required to repay the bond amount claimant directly.

Therefore, even though your surety bond might make sure you can settle your differences with your clients, they are not going to protect you from financial losses. That’s why when you buy a bond, you must guarantee that you will be able to provide the money and other obligations stipulated in it.

What are important terms to know about surety bonds? 

When you buy a surety bond, you essentially become part of a two-party deal between you and the client who could benefit from a bond claim. The business is the bond’s principal, which means they are the ones who buy, pay for and guarantee the promises made within surety bonds. Those who are the parties who could receive payment from the surety bond are known as obligees. They are those you will be obliged to pay if you cannot deliver on your promises.

Why are surety bonds benefits to my business? 

Surety bonds are guarantees that you will keep the promises you make to your clients. Therefore, when a business keeps its promises, it will usually experience not only better long-term stability, but also an improvement in its reputation and an increased ability to grow.

Surety bonds are required of service providers in many industries. For example, auto dealers often must obtain certain bonds before they can legally operate within their state or local jurisdiction. As a result, these bonds are often one of the stepping stones you need to use to open your doors.

Furthermore, if you plan to bid for government contracts, then you will be required to purchase surety bonds. Additionally, many non-government entities require bonds as part of the contracting process. After all, they want to make sure you will do what you say. Therefore, becoming bonded will act as a catalyst to help your business go after the deals that will help it grow.

There are multiple types of surety bonds on the market today. However, they all serve a purpose, and they will all provide complimentary support to their principals. Never hesitate to see if your business can benefit from this unique piece of financial reassurance.