Surety Bonds Are Not Insurance Policies

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A Surety bond guarantees the performance of a contract or other obligation. Bonds are three-party instruments by which one party guarantees or promises a second party the successful performance of a third party. One example of surety bonds in the construction industry protects the owner if a contractor defaults on the building contract. There are three types of contract surety bonds:

1) A bid bond is a good faith bid and the contractor will fulfill the contract at the bid price.
2) The performance bid bond protects the owner from financial loss if the contractor fails to deliver on the contract.
3) The payment bond assures that the contractor will pay subcontractors, laborers and suppliers for their work.

The bond company views underwriting as a line of credit and performs a careful pre qualification analysis of the contractor's ability and willingness to execute the contract operationally and economically. At times, subcontractors are required to take out surety bonds to back up their responsibility in delivering their part of the contract.

While a surety bond company is usually a subsidiary of an insurance company, each operates on a different business model. With an insurance company, an individual/insured pays a premium and the risk is transferred onto the insurance company. This protection affords the with various policies to enhance coverage with endorsements. For instance, an insurance company issues a basic general liability policy to protect a business from being sued due to an injury incurred on premises. The insured can add endorsements for deeper, more comprehensive coverage. Surety bonds do not have special endorsements to enhance the coverage.

With insurance, the insured pays a deductible and the insurance company covers the rest of the claim. That means the insurance policy restores the insured's financial condition before the time of the loss. With surety bonds, there is no deductible and if there is a claim because the bonded person did not fulfill a contract or service, the insured is protected, the surety company pays for the damages, then collects restoration from the contractor.

Limits on insurance policies are flexible and can be lowered or raised at any time. Surety bond amounts are pre-determined by the State or Federal Government and the principal cannot change them.

These days, bonds are difficult to obtain so having good credit, a good work history and a good list of financial and satisfied customers is important. Not every is eligible for bonding.
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