What is the Difference Between Insurance and Bonds?

A lot of clients ask: what is the difference between insurance and bonds? Although surety bonding companies are often regulated by state insurance departments, bonding is much different from insurance.

Insurance is a risk-sharing device with the policies created under the assumption that there will be losses. It is a two-party agreement where the insurance company agrees to pay the insured directly for the losses incurred. Insurance policies are typically written with several different coverages on one overarching policy. Expected losses and other expenses are calculated and form the basis for your premium. Other than a deductible, the insured does not have to pay the insurance company back. Insurance is created to protect you, the insured.

Bonds differ from insurance in that they are not calculated and rated in the same way. The bond’s premium can be considered a “service charge” that is determined based on actual or anticipated losses. Surety bonding is comparable to banking. Like bankers, bond underwriters extend credit in the form of dollars loaned, and the loan must be repaid. The receiver of the loan is investigated to assure that they will pay it back before obtaining the bond. Losses are not expected when bonding like they are with insurance. Bonds are created to protect your clients. The bond is in place to assure that you can cover any legal fees or losses that may occur if you make a mistake or are investigated.

Bonds are more selective than insurance. Most insurers try to write a policy on almost anything at the appropriate premium rate, while bonding agents are trained to be selective of who they grant bonds to. It is important to understand the difference between surety bonds and insurance when purchasing a new policy or bond. E. R. Munro and Company strives to educate our clients on what they are purchasing and what they are expected to do if they file a claim on that policy or bond.