Surety Bonds and Insurance
Mitigating risks for your business is an important part of being a business owner. That’s probably what brought you to this page in the first place. Business finance lingo proves to be challenging to the most intelligent and informed business men out there and having to choose between bonds or insurance might seem like fighting over the same thing. However, there are some subtle differences you should be aware of when making the decision.
- Parties involved
An insurance policy involves the insured (the business obtaining the policy) and the insurer (the policy provider). A surety bond involves three parties:
- The Obligee – the person who is protected by the bond
- The Principal – the person who gets the bond
- The Surety – the person who issues/supplies the bond
- 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 fulfils their contractual obligation.
- 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.
- 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.
Take a look at the following bonds offered by Credit Guarantee:
- 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.
- Performance Bonds
A 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.
- 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.
- 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!