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Working in construction means there are a lot of risks. Workers can be injured, equipment can be stolen, or damages could happen on the project site. Protection from these risks can take different forms. Surety bonds and construction insurance are common examples of such protection—and surety bonds are often confused with insurance.
However, it’s important to understand the two are different. Understanding the differences between construction insurance and surety bonds can help you determine which one you need on your next project.
Construction insurance is a contract between two parties, the insured and the insurer (insurance company). The insured will be compensated by the insurer in the event of a covered loss.
A Surety bond is a three party agreement. It legally binds together a principal who needs the bond, an obligee who requires the bond (usually by statute) and a surety company that provides the bond. If the bonded obligation is not met, the obligee can recover losses under the (Surety) bond for that specific project.
Insurance requires the insured to pay a premium to the insurance company. The premium is calculated against the value of the asset being insured or the size of the policy. As a result, the insurance company promises to protect the insured from financial loss.
When a surety bond is issued, the principal pays a premium or service fee to the surety company. There are several factors that determine how much premium the principal is charged, such as size and type of the required bond, the financial strength of the principal and the principal’s credit history to name a few.
With insurance, losses are expected. Depending on various factors (i.e. type of activity or type of business), insurance rates will be adjusted to cover such losses. Any claims against an insurance policy is then paid by the insurer; not the insured.
Losses are not expected if a surety bond is issued. They are a third-party guarantee that the bonded work will be completed. However, in the event of a loss, the “principal” is bound by an executed indemnity agreement with the surety company to make the surety whole for any losses sustained under the bonded obligation.
In surety, theoretically, there are no anticipated losses. Essentially, surety bonds are more of a credit-type instrument, as the “principal” has to qualify for the same.
It’s important to understand the differences between insurance and surety bonds as each has financial consequences to your construction company. Still have questions? Give TSIB a call today at (201) 267 7500! You can also download our Surety Solutions Brochure to learn more about TSIB's experience with Surety.