Surety Bond Claims vs. Insurance Claims: How They Work
If you are a business owner who is bonded and insured, you might wonder what the difference is between the bond claims process and the insurance claims process. There are distinct differences between each of these products regarding the party they protect and who will be responsible for paying the claim. As a result, the claims process for a surety bond is substantially different than the claims process for an insurance policy.As a business owner, you might be required to have both a surety bond and a commercial liability insurance policy. For example, an auto dealer is required to carry an auto dealer bond as a condition of their license as well as liability insurance. The bond and insurance are for different purposes. Here's what you need to understand about bond claims vs. insurance claims and how they work.
What Are the Differences Between a Surety Bond and Insurance?
Let's go into more detail about how these two products differ. A surety bond is a legal agreement between these three parties:• Principal - The party that must be bonded
• Surety - The bond company that provides the bond as a guarantee of the principal's ethics and legal compliance
• Obligee - The party that requires the principal to be bonded
In many cases, the obligee will be a public agency or licensing authority. For example, in most states, the Department of Motor Vehicles requires auto dealers to purchase auto dealer bonds before they will be approved for licenses. The bond functions as a guarantee that the principal will obey the law and engage in ethical business practices.
Insurance is a two-party contract between the policyholder and the insurance company. If the policyholder suffers a loss covered under their insurance policy, the insurance company will compensate them for the loss minus any deductible. Sometimes, a third party is also involved if the policyholder is responsible for damage to a third party.
By contrast, surety bonds do not provide liability protection for the bondholder. Instead, they are designed to protect the public from the bondholder's potential malfeasance. A surety bond is a type of credit the surety company extends to the bondholder. If the bondholder violates the conditions of the bond, the harmed party can file a claim against the bond. While the bond company will step in and pay a valid claim, the bondholder will have to reimburse the surety company in full for all amounts it paid on their behalf.
Differences in Surety Bond vs. Insurance Underwriting
The underwriting process for a surety bond and insurance also differs. When you
apply for an insurance policy, the underwriting factors the insurance company
will consider will vary based on the policy. They might include things like
your geographic location, claims history, age, credit history, coverage amount
requested, and the deductible.The factors considered in surety bond underwriting will also be based on the type of bond and its amount. Some of the additional factors that might be considered include your credit history, claims history, industry experience, financial stability, working capital, the type of risk, and your business reputation.
Surety Bond Claims
When you are approved for a surety bond, you will have to sign an indemnity agreement with the bond company. This agreement legally obligates you to reimburse the surety for any valid bond claims it pays on your behalf. A bond claim is a legal action the obligee can take against your bond when you have broken the law or have otherwise violated your bond conditions.Your surety bond protects the public from fraud or other types of misconduct you might commit while working in your business. A surety bond guarantees your compliance, performance, or payment. If you violate any of the conditions of your bond or a contract under which you are required to secure a bond, the obligee can file a bond claim. The surety will cover the costs of the claim up to the penal sum of your bond, but you will have to pay the surety company in full or face legal action.
The Surety Bond Claims Process
An important difference between surety bonds and insurance policies is the party who must ultimately pay the claim. When someone files a claim under your insurance policy, the insurance company will investigate. If the claim is valid, the insurance company is the party that will be responsible for paying the claim. You will only be responsible for meeting your deductible.By contrast, with a surety bond, the principal is the party with the ultimate financial obligation. The indemnity agreement provides the surety with a contract that allows it to seek recovery from you for its losses. An indemnity agreement typically gives the bond company the right to reimbursement from the bondholder for the amount of a bond claim, any expenses and costs that result, and attorney's fees.
If you violate the law or engage in malfeasance, a bond claim can be filed against your bond. The surety company will investigate the validity of the claim. If it determines that the claim is valid based on the documentation submitted by both you and the claimant, the claim will be paid out. You will then have to reimburse the surety for the claim amount and potentially any related expenses the company incurred.
While a surety bond doesn't protect you, it might be required as a condition of licensing, depending on your industry. Being bonded also shows potential customers that you are financially stable and will engage in ethical business practices. As a result, having both a surety bond and insurance might help to increase your customer's trust, thus increasing your customer base.
