The confusion in the proper use of an insurance policy versus a bond often leads to the request for the wrong coverage product. 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 a basic misunderstanding. Bonds and insurance policies both offer protection, but who they protect, how they protect and who pays is totally different.
One of the more common issues is when an insured or agent hears the requirement of fidelity in a contract or from the insured’s client. Many gravitate to asking for a Fidelity Bond when what they really need is a Crime Policy. Both provide coverage for fidelity exposures but do it in different ways.
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, that issues the bond. A bond is a form of credit. Normally bonds are only issued if a 3rd party (Obligee) is requiring 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.
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 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. 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.
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 his 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--claim is paid by the insurance company normally without an expectation to be repaid by the insured.
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 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 protection.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080 |