What Is The Difference Between Surety Bonds And Insurance?

Mitigating risks for your business is an important part of being a business owner. Subsequently navigating through finance lingo proves just as challenging. You might ask yourself, “What type of insurance does my business need? Or does my business need bonds instead? What is a surety bond? What type of surety bonds are there?” Rest assured, we’ll help you uncover the right option by explaining the difference between surety bonds and insurance.

Surety Bonds

What Is A Surety Bond?

A surety bond is a legally binding agreement between three parties, namely the Obligee, the Principal and the Surety. The Surety guarantees the Obligee that the Principal will adhere to the terms of the bond.

How Does A Surety Bond Work?

A surety bond is reliant on the three parties of the agreement:

  • Obligee:  The Obligee is the person who is protected by the bond
  • Principal:  The Principal is the person who purchases the bond and guarantees to fulfill the terms specified in the agreement.
  • Surety:  The person (e.g. insurance company) who issues/supplies the bond.

After the three parties enter into agreement and the terms of the bond isn’t met, a claim is filed against the bond. If the claim is valid, the Surety will pay reparation to the Principal that cannot exceed the bond amount.

The Differences Between Surety Bonds and Insurance

When deciding between a surety bond and insurance for your business, the following differences need the be taken into account.

  1. Parties involved
  2. Payment of premiums
  3. Financial loss liability
  4. Premium cost

1. Parties involved

An insurance policy involves two parties in the agreement, namely the insured (the business obtaining the policy) and the insurer (the policy provider). On the other hand a surety bond involves three parties into agreement the oblige (the protected person), the principal (the person who fulfills the terms) and the surety (the person who issues the bond).

2. Payment of premiums

Insurance premiums are often paid monthly and mitigate the risk of any losses that might occur. A surety premium is paid once and only paid again if the bond needs to be renewed. The purpose of the premium is to guarantee that the principal fulfills their contractual obligation.

3. Financial loss liability

An insurance company absorbs the financial loss of a claim against an insurance policy and will only charge a small excess fee to the business. In stark contrast, when a claim is made against a surety bond, the surety will pay the cost of the claim, but will hold the principal accountable for the full reimbursement of the claim amount. This means that surety works more like a type of credit provider than an insurance policy.

4. Premium cost

When considering insurance premium costs, the value of the asset and the risks that the asset is exposed to, are considered to calculate a premium cost. When calculating the premium of a surety bond, the size and type of bond, and the financial strength of the principal is considered. Bonds that carry a high risk factor will be more expensive.

Where to Get A Surety Bond?

Credit Guarantee is a South African Financial Services company, specialising in surety bonds and operating in the field of domestic and international credit insurance. We will help you choose the best surety bond for your business.

Types of Surety Bonds

Credit Guarantee offers a variety of insurance products and surety bonds to suit your requirements at every stage of your business. The following are some of the surety bonds available.

  1. Bid / Tender Bonds
  2. Performance Bonds
  3. Retention Bonds
  4. Advance Payment Bonds
  5. Customs Bonds

1. Bid / Tender Bonds

Issued as part of a bidding process, the surety guarantees the project owner that the winning bidder will abide by the contract agreements.

2. Performance Bonds

performance bond normally replaces a bid bond and is there to ensure that the contractor completes the project according to agreed performance goals, failing which, the insurer will pay a sum of money to the insured to compensate for any losses incurred.

3. Retention Bonds

After a project has been completed, a retention bond is usually taken out to ensure that the contractor will carry out any necessary repairs or correction of defects found within a specific time period after the completion of the project.

4. Advance Payment Bonds

An advance payment or simply an advance is part of a contractually due sum that is paid upfront for goods
or services, while the balance included in the invoice will only follow after the delivery. It is called a prepaid
expense in accrual accounting.

5. Customs Bonds

Customs bonds are issued to guarantee payment of customs fees on goods imported. It does not protect the importer, but rather ensures that all charges issued by customs will be paid.

If you need help deciding which bond or insurance policy is for you, contact one of our consultants today for expert advice, catered to your business needs!


Editor’s note: This post was originally published in May 2019 and has been updated for accuracy and comprehensiveness.

Share

Get a personal consultation.

Company Information:
Contact Details: