There is often confusion as to the purpose of an insurance policy versus the purpose of a bond. Many people think that there is little to no difference and become frustrated when trying to obtain a bond over an insurance policy or the reverse because of that basic misunderstanding. Bonds and insurance policies both offer protection, but who they protect, how they protect and who pays is totally different.
The major differences between an Insurance Policy and a Bond are:
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, that issues the bond. A bond is a form of credit. Normally bonds are only issued if a 3rd party is requiring a bond.
An Insurance Policy-- is a two-party contract; there is an insured and an insurer. There is no requirement that a 3rd party requires an insurance policy to have an insurance policy issued.
The Protection:
An Insurance Policy-- protects the insured against an insured loss.
A Bond-- is a form of credit that protects the Obligee by guaranteeing payment for the Principle.
The Underwriting:
A Bond-- is based on the ability for the Principle to make the Obligee whole in the event of a claim. Depending on the type and size of the bond, it is not uncommon 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.
An Insurance Policy-- is based on the insured fitting into the criteria and having the exposures expected for this form of insurance. The risk is spread by having a pool of like insureds with a similar exposure. An insurance company expects that on a certain number of insurance policies will have losses.
The Premium:
An Insurance Policy-- premium paid is designed to cover the potential losses.
A Bond-- premium paid is for the guarantee that the principal fulfills his obligation.
The Losses:
An Insurance Policy—has losses that are expected and insurance rates are adjusted to cover losses depending on many factors.
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 they have the assets to pay the bond losses.
The Claims:
An Insurance Policy-- claim is paid the insurance company normally without an expectation to be repaid by the insured.
A Bond-- is a form of credit, so the Principal is responsible to pay any claims. The surety company is guaranteeing payments to the Obligee.
Some of the common bonds that L Squared Insurance Agency normally handles are; Notary Bonds, ERISA Bonds, Crime/Dishonesty Bonds, Court Bonds, Guardian/Conservator Bonds and Surety Bonds. Generally if the bond limits are relatively low there are few questions that are 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.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080 |