A surety bond is an important investment for many business owners. It provides financial protection and peace of mind. Yet, many people do not realize it is significantly different from insurance. 
Do you need to have insurance and bonds? The answer to this is generally yes. But you need to know what they cover. Most often, surety bonds will provide different protection from a liability insurance policy.
What Does Insurance Do?
Insurance policies provide a form of risk management. There are two parties involved in this contract. It is an agreement with the insured individual, such as the company, and the insurance provider. The policy assumes a promise occurs. It assumes the company will have financial coverage and compensation by the insurer when an accident happens. This occurs when a claim occurs.
Insurance works to protect the insured company from a loss. In these instances, a third party – perhaps a customer – files a complaint against your business. The insurance policy covers the claim on your behalf.
What Do Surety Bonds Do?
Surety bonds are a bit different. There are three parties involved in these contracts. A surety company issues the bond. These bonds see use on behalf of the second party. This party (usually the business) is the principal of the plan. The third party is the obligee. This is the person receiving the work or paying for the service.
The bond guarantees the principal will complete the project or service to the obligee. When this does not happen, the obligee has the ability to recover the losses he or she faces by claiming the bond.
In short, the surety bond works to protect the obligee in the incident. It does not cover the company directly, but the person receiving and paying for the work. The bond guarantees the principal in the instance completes the obligation set forth.
Surety bonds are necessary in many situations. Often, it is the obligee who requires the use of these bonds. He or she wants to ensure the principal completes the work properly. This typically occurs because of the significant investment in the project. Or, the project must have very specific needs and requirements.
In many situations, it is necessary for a party to invest in surety bonds to secure bids. It can also be important to invest here when there are high risks. Doing so does not eliminate the need for proper business insurance.