The two are commonly confused. Many think that surety is insurance, but it is ASSURANCE.
Surety is a guarantee. The only reason surety is licensed under the insurance division of most states and lumped in with the sale of insurance is because it is a transfer of risk. One serious difference between insurance and surety is to whom we are transferring the risk and the kind of risk we are transferring. The two-party insurance contract transfers the risk of the insured to the insurance company. The three-party surety contract transfers the risk of the beneficiary (obligee) regarding the customer (principal) to the insurance company. This transfer of risk is where similarity between surety and insurance ends. Other differences between surety and insurance:
Surety
- Three party agreement
- The surety guarantees the faithful performance of the principal to the obligee.
- Protects a third party or general public
- No protection for the principal. The underwriting process is a prequalification of the principal that gives the principal the privilege to do something.
- Losses NOT expected
- Though some losses do occur, surety premiums do not contain large provisions for loss payment. The surety supports the principal on only those risks which its underwriting experience indicates are safe.
- Losses are recoverable
- A bond is similar to a “loan”; the surety is “lending” its credit to the principal. After a claim is made, the surety expects to collect its losses from the principal.
- Premiums cover expenses
- A large portion of the premium of a surety bond is actually a service charge for weeding our unqualified candidates and for issuing the bond.
- Sureties are selective
- A surety agent is selective. Like a banker, they are trained not to make nay bad loans.
Insurance
- Two Party Agreement
- Basically two party agreements where the insurance company agrees to pay the insured directly for any losses that occur.
- Protects the customer or their family
- When someone purchases insurance, the policy is there to protect them or their family if something were to happen.
- Losses ARE expected.
- Insurance rates are adjusted to cover any losses and expenses as the law of averages fluctuates.
- Losses are usually not recoverable
- When an insurance company pays a claim, it usually does not expect the insured to pay it back.
- Premiums cover losses
- The premium that the insured pays is to cover any potential losses.
- Insurers write most risks
- An insurance agent usually tries to write a policy any anything that comes along and allows for a larg volume to cover the risk.
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