How Surety Bonds Are Different Than Insurance

business-962364_1920Bonding Defined

There is a big difference between a surety bond and business insurance. With church business insurance, there is a contract or agreement (the policy) between the insured and insurance company. The church business insurance policy outlines the terms of the agreement. Under the policy terms, the insurer agrees to indemnify the insured for any damages or loss to a third party that is covered under the policy.

A surety bond is a three party agreement between the surety (insurance company) and the obligee (owner) and the principle (contractor). Under a surety bond the insurance company agrees it will perform the obligations of the principle if the principle is unable to perform the specifications of the contract. There are many different kinds of bonds including bid bonds, performance bonds and payment bonds. If your company has signed an agreement to build a building to the contracted specifications and for a pre-determined price, a performance bond would provide protection or proof that you will complete the job per the terms of the contract. If you are unable to perform, the surety will step in and make sure the project is completed per the contract terms.

There are many reasons that contractors might need a bond as part of their business operations. Some of these are:

  1. Inability to meet contract terms
  2. Problems with sub-contractors
  3. Financial issues

Surety bonds are a way to protect the owners of a project for failure of the contractors. It can also help contractors obtain jobs, as the surety agrees to take over the obligations of the contractor under certain circumstances.

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