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Do you know the difference between a bond and insurance? If you don’t, have no fear. That’s what we’re here for! Specifically, we’ll be going over the difference between surety bonds and liability insurance in the construction industry. If you’ve ever won a big government contract, you’re likely familiar with surety bonds.
A surety bond, in the context of construction, is a guarantee that a contractor will perform a certain action stated in the bond – whether that’s to complete the project, properly pay subcontractors, or honor the budget.
There are at least three parties involved with a surety bond. There’s the surety (or person issuing the bond), the obligee (the person who gets paid in the event that the contractor does not fulfill the obligation), and the principle (the contractor).
This is in contrast to liability insurance, which involves two parties: the insurer and the insured. There’s commercial general liability (CGL) insurance that covers you for personal injury, property damage and advertising injury that could occur during the course of your business activities. There’s also professional liability insurance that protects your business when a client feels they’ve been harmed due to your professional advice and guidance.
A key difference between bonds and insurance is that insurance protects your business in the event that you are accused of a wrong whereas a surety bond protects your client’s business if you do something wrong. Another important distinction is that insurance operates under the assumption that mistakes will be made whereas with a surety bond, it’s to ensure that mistakes will not be made.
There are four types of surety bonds:
- Bid bonds, i.e. I promise to stick to the price I bid on the project.
- Performance bonds, i.e. I promise to fully complete the project.
- Payment bonds, i.e. I promise to pay my suppliers.
- Ancillary bonds, i.e. I promise to fulfill a specific non-performance related obligation stated in the contract.
Now you’re probably wondering, ͞Why would I want a surety bond?.
You usually get a surety bond because the project owner of the work you’re bidding on requires it in order for you to perform the work. Federal construction contracts costing $150,000+ require them, and state-level government contracts often require them too.
What happens if I don’t fulfill the promise stated in my surety bond?
When a contractor fails to deliver on the promise stated in the surety bond, the contractor, and the surety are severally (both) responsible for paying the project owner (obligee) a penalty (known as the penal sum).
When you look to obtain a surety bond, the bond issuer looks at several factors including your business’s years of operation, reputation, your capacity to do the work (i.e. whether they think you have the bandwidth), and makes a determination as to whether they think you’ll be able to fulfill the obligation.
Do you have any experience with surety bonds? Add your thoughts/advice/questions in the comments! If you need to obtain one for an upcoming project, use one of our time-saving tools to request a quote or schedule a call!