There are five major differences between Insurance and bonds;

1.  The Contract
Insurance:  a form of risk management.  It is a two-party contract between the insured and the
insurance company.  This contract (insurance policy) assumes a guaranteed promise that the
insured will be compensated by the insurance company in the case of a covered loss.
Bond:  a Bond is at least 3 parties’ contract.  It is issued by one party (the surety) on behalf of a
second party (the principal).  This contract guarantees that the second party will complete an
obligation to a third party (obligee).  If the obligation is not met, the third party can recover its
losses from that bond.

2.   Protection
Insurance:  Protects the insured against a risk.
Surety Bond:  Protects the obligee.

3.  The Premium
Insurance:  The premium paid is designed to cover the potential losses.
Bond:  The premium paid is for the guarantee the principal fulfills his obligation.

4.  Losses
Insurance:  Losses are expected and insurance rates are adjusted to cover losses depending on
many factors.

Bond:  Losses are not expected so bonds are issued only to qualified individuals or businesses

whose projects require a guarantee.

5.  Claims
Insurance:  When a claim is paid the insurance company usually doesn’t expect to be repaid by
the insured. 

Bond:  A bond is a form of credit, so the principal is responsible to pay any claims.

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