Contractor Bond vs Insurance: What’s the difference?

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Written By Berry Mathew

Insurance and surety bonds in the construction provide protection and coverage between the concerned parties in the project in case a dispute arises. However, the two may be different from each other and have various functions as well. 

Many homeowners take a leap of faith when they decide to hire professionals for renovation and construction work. They are free to look at the client testimonials, portfolios, and call references, but afterwards, what you need is for them to finish the project, and there’s no guarantee about the outcome. You need construction companies that offer both surety bonds and insurance.

Differences to Know About

Insurance is one form of risk management where it generally functions as contracts between individuals and insurance companies. The insurer will create a policy that guarantees that the insurers will be able to compensate for any loss or cover an individual in case of an accident. This is generally between two parties.

Surety bonds are also a contract, but it’s covering three parties. The surety company will cover any unfinished or unsatisfactory work done by the contractor, the individual who requires work to be finished (obligee), and the principal who does the work. This bond will make sure that the principal is going to do the job in accordance with the terms of the contract. If they leave anything unfinished, then the homeowners can file a claim for the bond from the surety company so they can recover their losses and start another project once again.

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Who Is Being Protected in the Two?

The insurance essentially protects the professionals, homeowners, business owners, and other individuals who have applied for it in the first place from any financial losses. This will only happen if a claim occurs. It’s worth noting that the individual who will get the claim is the one paying the premiums in the first place.

On the other hand, the surety bond essentially protects the homeowners from unfinished work by reimbursing them. It’s often the construction company that pays California Contractors License Bond – Contractor Bonds $65 instead of the ones needing the project to be done. Bonds are often popular for government and federal projects where the company needs to obtain one before bidding for a specific job. Still, other homeowners may require this for small projects.

What to Know about Premiums?

The insurance premiums are often payable every month. Their primary role is to cover any potential loss of a business or an individual because of natural disasters, accidents, negligent acts, and other specific events. This is different from a surety bond, where the premiums are designed to make sure that the principal is going to fulfill his part of the contract or else the surety company is going to pay for the losses.

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How the Claims are Being Handled for the Two

Most of the time, the insurance companies investigate what happened to a specific project, business, job, or person whenever a claim is made. If they have found out that the claim is valid and includes a covered loss included in the policy, then reimbursement will be arranged. The insurance company does not expect any refunds for the amount they have paid to the insured for the loss claim.

On the other hand, the surety company will work with the principal and the obligee before the claim against the bond can be filed. When the surety concludes that the homeowners’ or obligee’s claim is legitimate, they expect the principal to respond or resolve the issue. Most of the time, the construction company will also defend its position so that a claim won’t be made.

If the contractors or principal fails to defend themselves or doesn’t satisfy the obligee, the surety will step up into the situation depending on the case. These companies are not expected to get reimbursed for the expenses that were incurred during the settlement and investigation phases.

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How Do They Work?

Insurance generally offers financial protection in cases of employee injuries, work that has caused bodily harm, stolen or damaged equipment, and many more. In exchange for this coverage, like stolen equipment, then the obligation of the company is to you, who is the policyholder. 

On the other hand, the surety provider will ensure that the principal will meet their obligations to the client. There’s no need to pay for the total amount of the surety bond, and only a tiny fraction is required. Depending on the business owner’s credit rating, the amount will vary from 1% to 5%.