A surety bond or surety is a promise by a surety or guarantor to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation.
Understanding Surety Bonds vs. Insurance
For business owners and project managers alike, both surety bonds and insurance policies can be very practical – and often required by law in some states. Surety bonds should be considered a form of investment toward avoiding risks associated with doing specific types of business – also known as “surety insurance”. It’s critical to understand that just because surety bonds offer financial assurance, it does not make them an insurance policy. Sometimes it can be confusing for consumers as they are both forms of financial risk prevention tools. However, surety bonds should be considered more of a form of “credit” in the event that a claim is made against a business.
Insurance, on the other hand, is specifically designed to compensate for the loss, and protect your financial assets from being taken in such instances. Surety bonds do not reduce the reality of risk associated with the principal purchase, whereas an insurance company would – minus the premium and deductible paid. Insurance policies as a financial security measure, will usually cover multiple parties and your assets. A surety bond is often more stringent in applying and qualifying for, as the underwriting professionals in charge of issuing bonds will run a strict credit background check and even examine your business's history.
An insurance policy is unique because it assumes a higher likelihood of risk, so all parties or members that have a plan, as they pay their premiums, are contributing to financial asset availability for that insurance company to pay out in the event of an incident that would require settlement. A surety bond is not based on the expectations of fiscal damage, therefore, the insured should expect to have to repay the total amounts in full if and when a claim is made against their bond.
Why Get Bonded and Insured?
Any new businessperson, as well as those that already have a company and are considering obtaining additional financial protection can benefit greatly from both bonds and insurance policies. Bonds provide assurance and protection when utilizing sub-contractors or working directly on the property of a client. While insurance offers protection in the form of compensation for you and your company in the event that property may be lost, damaged, or stolen. Utilizing both bonds and insurance can be a great way to save your company money in the long run, and are available in various packages (policies) designed to meet your exact business needs. Understanding the process of getting bonded or insured is critical to any serious business owner looking to protect both their business, as well as their clients in a meaningful way.
Not every business or profession may be eligible for a surety bond. It will depend on government regulations or laws - as well as the stipulations set out by the project manager. Often insurance companies will try to serve a dual role in providing both bonds and insurance coverage. However, this can be damaging, as their professionals may not be as well trained as an agency that specializes in surety and other bond services. It is in your best interest to go with a bonding agency that has the necessary experience, and resources, to properly assist you if or when a claim is made against your bond. Using an insurance company for obtaining insurance policies, and a bonding business for obtaining bonds makes the most sense. Utilizing a managing general underwriter (MGU) with the necessary experience that knows how to precisely handle claims and protect you while offering the best rates is a critical asset to any business.
Surety & Construction Bonds Hold Legal Precedence
With construction jobs, bidding, and public contracts, a Construction Bond is required by law, as are “performance bonds” as a way of guaranteeing that subcontractors will be paid and supply costs met. This is a form financial protection and assurance that the holder of the bond or “principal” will have the financial means to get the job done, before bidding. Obtaining a surety bond could be considered as going through a filtration or ‘buffer’ system to prevent unreliable bidders that bid on projects they’ll unlikely be able to complete. Remember, as opposed to an insurance policy for your business and contracts, a surety bond is designed to protect the obligee or project owner - not the original purchaser of the bond. You should still expect to be held financially responsible for premium costs associated with purchasing and maintaining the bond, as well as any financial losses involved which might disrupt or negatively impact the project owner – including government entities.
When you apply for and receive a surety bond, a document - known as the “indemnity agreement” will illustrate the requirements which involve your financial obligation to repay any losses to the underwriter (bonding agency) if or when a claim is made. Surety companies will typically avoid at-risk principal applicants, which, helps prevent those that are likely to be unable to financially repay losses later – or those that may refuse to do so from obtaining such bonds. This is why background checks and credit checks are so important, and, are a part of the requirements for obtaining a bond. For those that are interested in learning more about surety bonds, feel free to check out our no-obligation quote applications, we’ll walk you through the process! You are welcome to contact us anytime during business hours with any questions or concerns you might have regarding being bonded.
The Process of Getting Surety and Fidelity Bonds
Determining which type of bonds your business could benefit the most from is the first step. It is also important that you conduct the necessary research to determine whether or not one bond option may be more beneficial than the other. For example, surety bonds are those which are typically required by the government, as it protects both the public and itself as an entity – or the project manager. Fidelity bonds, on the other hand, are designed to protect your business and business assets from any employee theft or fraud.
This is why it is important to go with a company that explicitly specializes in bonds, Even insurance companies that are licensed to offer bonds are not always the best for bonding services, as they specialize in property and casualty claims. Go with a licensed, trusted company with a positive reputation to find the best bond solutions for you and your business. Surety bonds can vary in price and the type of coverage you require, as well as your credit history will both be taken into account. Surety bond rates can change over time, depending on the stipulations and requirements of the agreement.
Surety bonds are not designed to replace the benefits and security of having an insurance policy to protect your company assets. Rather, they should be considered a form of ‘credit’ in the case that such protection is needed should someone attempt to make a claim against you. The underwriter or bonding agent will determine your level of risk, and whether or not to approve your application – as well as the cost of your premium. If an agency is advertising a set cost for a bond, they are almost always listing the lowest possible rate, not necessarily what you’ll be paying.
Which Type of Bond is Best for You?
Because there are so many different types of bonds available, as well as those that are required, research and using a trusted bond agency is a must. As you’ll find, some contract surety bonds are designed to protect specific professions, professionals, or contractors. While, fidelity bonds, are typically in place to protect the business – and are often required by law.
Going with an agency that specializes in bonds can make all the difference in getting the best deals, rates, and support. Remember, in nearly every case, a bonding agency that has the necessary experience, knowledge, and credentials will always be superior to an insurance company that claims to specialize in or provides its own independent (often third party) bonds.
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