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Getting a surety bond and insurance for a business are considered the same by a layperson. It is generally misunderstood because of the claim of damages in the event of loss. This process goes the same for surety and insurance. To understand, surety bonds generally involve three people to agree. The insurance requires only two parties to agree. Due to the required number of parties to be involved in a surety bond, it makes it a unique agreement.
WHAT ARE SURETY BONDS?
Surety bonds offer financial protection or a guarantee to compensate the aggrieved party in the event of uncertainty. Surety Bonds versus Insurance is a distinction often misunderstood—while both provide protection, surety bonds ensure the contractor meets obligations, whereas insurance typically protects the insured party from loss. Surety bonds are usually obtained to ensure that the contractor does not engage in any malpractices against the project owner. If the contractor fails to fulfill their obligation towards completing the project, then the surety company shall compensate the project owner for any damages caused. The surety company shall make quick payment to the project owner, and later on collect the amount from the contractor.
WHAT IS INSURANCE?
The contract of insurance involves only two persons, the insurer and the policyholder. An insurance policy will provide the terms of payment only in the event of the agreed-upon event. The policyholders are required to make the first payment as premiums, and then, the insurer becomes liable for paying any loss suffered by the policyholder. The policy owner has to pay a monthly, quarterly, or yearly payment to the insurer for securing a valid insurance contract.
WHO PAYS FOR CLAIMS?
The main difference between surety bonds and insurance lies in the payment of claims. In a surety bond, the surety company makes payment to the project owner for any default caused by the contractor. And thereafter, recover the amount from the contractor for the damages caused. The surety company acts as a mediator between the project owner and the contractor. But, in insurance, the loss is only paid by the insurer to the policyholder. There is no recovering of money from a third party.
CONCLUSION
A person needs to understand the distinction between a surety bond and insurance. It becomes crucial, as it assists the purchaser to select between these two financial instruments. A surety bond and insurance both provide financial protection against a specified event. The surety company is only obliged to perform its contractual obligation. The insurance covers damages caused to property or health. You should do necessary research before selecting a surety company for obtaining a surety bond. Without saying, the same goes for insurance as well. If you are experiencing any confusion while choosing the right surety company, then feel free to consult a professional for help. This will enable you to make a sensible decision in choosing the correct bond or insurance. These two financial instruments are significant, as they involve getting compensated for any loss suffered during business.
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