Surety bonds and insurance both manage financial risk but serve different purposes. While they may seem similar, each offers distinct protection tailored to specific business needs.
In this guide we will explain surety bonds and insurance, covering their definitions, claims process, costs, and financial protection. We’ll also explore their types, who needs them, and key differences to help you determine the right choice.
What is a Surety Bond?
A surety bond is a three-party agreement:
- Principal: The party buying the bond, responsible for meeting obligations (e.g., contractor or business owner).
- Obligee: The party requiring the bond, often a government agency or project owner.
- Surety: The company issuing the bond, guaranteeing the principal’s obligations and covering losses if they fail.
A surety bond guarantees that the principal meets contract terms and legal requirements. If they default, the surety compensates the obligee but must be repaid by the principal.
Common in construction, licensing, and government contracts, surety bonds are recommended by the U.S. Small Business Administration (SBA). The National Association of Surety Bond Producers (NASBP) notes that contractors may need bonds for up to 80% of government projects. Key types include performance, license and permit, and fidelity bonds.
What is Insurance?
Insurance is a contract in which one party agrees to provide financial protection or reimbursement for certain types of risks to another. The insured party pays a premium to the insurer, and in return, the insurer assumes the financial risk for specific events.
The primary goal is to protect the insured from unexpected financial losses, resulting from events such as accidents, theft, natural disasters, or liability claims. Unlike surety bonds, which primarily focus on guaranteeing a third party’s interests, insurance protects the insured party itself from financial consequences arising from these risks.
Types of insurance include:
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Health insurance: Covers medical expenses for individuals or families. In 2023, the average annual premium for an individual health insurance plan was approximately $8,435. The total U.S. health insurance market is expected to reach $2.7 trillion by 2027, driven by increasing demand for coverage.
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Auto insurance: Protects vehicle owners against financial loss from accidents, theft, or damage. The U.S. motor vehicle insurance market is projected to reach US$349.37 billion by 2025.
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Homeowners insurance: Covers property damage and liability for homeowners.
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Business insurance: Includes policies like general liability and workers’ compensation to protect businesses. The average cost of small business insurance in the U.S. is under $3,000 annually.
Insurance can cover a variety of risks, with each type providing different coverage based on the needs of the insured.
Key Differences Between Surety Bonds and Insurance
Claims Process: How They Work Differently
The claims process highlights one of the most significant differences between surety bonds and insurance.
Surety bond claims process:
- Claim filing: The obligee files a claim against the bond if the principal fails to fulfill their obligations.
- Investigation: The surety investigates whether the principal’s actions or failures align with the terms of the bond agreement.
- Payment: If the claim is valid, the surety compensates the obligee for their losses up to the bond amount.
- Repayment: The principal is responsible for repaying the surety for any claims paid out, often leading to legal action to recover the funds.
Insurance claims process:
- Claim filing: The insured files a claim with their insurer, detailing the damage or loss.
- Investigation: The insurer investigates the claim, often through an adjuster, to determine the extent of the damage and if it’s covered under the policy.
- Payment: If the claim is valid, the insurer compensates the insured for the covered losses.
- No repayment: The insured does not have to repay the insurer unless the claim was made fraudulently or under false pretenses.
Premiums & Costs: How Are They Calculated?
Surety Bonds:
- Premium calculation: Surety bond premiums are typically calculated as a percentage of the total bond amount. This percentage typically ranges from 1% to 5%, depending on the size of the bond and the risk involved. This can increase to as much as 15% depending on the credit score and financial risk of the business.
- Factors influencing premiums: Creditworthiness of the principal, the nature of the contract, and the industry involved all play a role in determining surety bond cost <insert link to surety bond cost blog/edu>.
Insurance:
- Premium calculation: Insurance premiums are determined by factors such as the type of insurance, the insured’s risk profile, and the coverage limits. For instance, auto insurance premiums vary depending on the driver’s history, car model, and location. However, the average cost of auto insurance in the U.S in 2025 is $2,543.
- Factors influencing premiums: Risk factors such as age, health, vehicle type, and even geographic location can significantly impact the premiums for both individuals and businesses.
Who Needs a Surety Bond vs. Who Needs Insurance?
Who needs a surety bond:
- Contractors: Contractors typically need performance bonds to secure government or large-scale construction contracts.
- Business owners: Some industries require businesses to obtain bonds to obtain licenses or permits to operate legally.
- Individuals: Individuals involved in certain legal processes, such as court proceedings or bail, may be required to purchase bonds.
Who needs insurance:
- Individuals: Health, auto, and homeowners insurance are necessary for personal financial protection.
- Businesses: Businesses of all sizes need various types of insurance, including general liability, workers’ compensation, and property insurance.
While surety bonds and insurance both offer financial protection, they serve distinct purposes and address different types of risk. A surety bond guarantees the fulfillment of a contractual obligation, providing assurance to a third party that the terms will be met. In contrast, insurance protects individuals or businesses from a wide array of risks and financial losses.