Insurance Bonds and insurance policies both offer protection, but who they protect, how they protect and who pays is different. While the name of an insurance bond product and an insurance policy may sound the same. Each is intended for a specific purpose.
A good example is a Fidelity Bond versus a Crime policy. Why not just get the cheaper insurance contract. Both provide coverage for fidelity exposures but solve different coverage issues.
So, what are major differences between an Insurance Policy and a Bond?
The contract:
A Bond-- is a three-party contract; there is Obligee that is requiring the bond, the Principle that needs the bond to meet the requirements of the Obligee, and Guarantor, the surety company, which issues the bond. A bond is a form of credit. Normally bonds are only issued if a 3rd party (Obligee) requires the bond.
An Insurance Policy-- is a two-party contract; there is an insured and an insurer. To have a policy issued there is no requirement that a 3rd party requires an insurance policy.
The Protection:
A Bond-- is a form of credit that protects the Obligee by guaranteeing payment of the Principle. If the Surety Company pays a claim, it will expect reimbursement from the Principle.
An Insurance Policy-- protects the insured against an insured loss. Once the claim is paid, the insurer will not require reimbursement from the insured.
The underwriting:
A Bond-- is based on the ability of the Principle to make the Obligee whole in the event of a claim. Depending on the type and size of the bond, it is common for the Principle that is applying for the bond to have to produce audited financial and bank statements proving that they have the assets to make the Obligee whole. In other words, if the Principle needs a $1 million bond limit, they will have to prove that they have a $1 million in assets that can be used to repay the Surety Company in the event of a loss. Surety Companies do not expect losses that are not reimbursed.
An Insurance Policy-- is based on the insured fitting into the certain risk criteria and having the exposures expected for this form of insurance. The risk is spread by having a pool of like insureds with similar exposures. An insurance company expects that on a certain number of insurance policies will have losses.
The Premium:
A Bond-- premium paid is for the guarantee that the Principal fulfills their obligation.
An Insurance Policy-- premium paid is designed to cover the potential losses.
The Losses:
A Bond—does not have losses that are expected so surety bonds are issued only to qualified individuals or businesses who are required to provide by a guarantee by a 3rd party. To be qualified, the individual or business must be able to prove that they have the assets to pay the bond losses.
An Insurance Policy—is issued with the expectation of some losses being paid and insurance rates are adjusted to cover losses depending on many factors.
The Claims:
A Bond--is a form of credit, so the Principal is responsible to pay any claims. The surety company is merely guaranteeing payment to the Obligee.
An Insurance Policy--the insurance company pays claim normally without an expectation to be repaid by the insured.
The common bonds that L Squared Insurance Agency writes are Notary Bonds, ERISA Bonds, Crime/Dishonesty Bonds, Court Bonds, Guardian/Conservator Bonds and Surety Bonds. If the bond limits are relatively low, there are few questions asked. If the bond limits are high, expect to provide proof in the form of audited financial statements and bank statements that the Principle has the assets to pay the bond limits.
In additional to professional liability insurance and errors & omissions insurance, L Squared also can provide general liability insurance, crime insurance and cyber insurance for those firms that are required to carry these coverages by their clients or want these coverages for their own piece of mind.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080