Like you — most entrepreneurs in Southern Michigan, and the Michiana region who are launching or, in company expansion mode tend to begin their business insurance research by asking, “what types of protection exist for a business, and which ones do I need”
Your research into securing your company assets and building safeguards around your business leads to you learning about business insurance and bonds.
This new found information prompts another question — “Do I get bonded and/or insured?”
Perhaps you have the same types of questions.
To make the best business decision, you are going to need to understand that while insurance and bonds are both designed to protect your company against loss, there are some major apple-to-apple differences.
Business Insurance Versus Bonds
On the surface it is easy to see why you and other business owners often get confused when trying to differentiate between bonds and liability insurance.
I assure you they each have glaring major differences.
Here’s a scenario, that I hope makes it crystal clear:
When you purchase an insurance policy, you are protecting yourself against a loss.
When you purchase a bond, you are protecting someone other than yourself, or promising to make payment against a loss.
Let me provide a couple of examples.
If you buy a business liability policy, one of the purposes is to protect yourself against someone stealing your possessions.
If you are burglarized, you file a claim and the policy reimburses you for the cost to replace the stolen property.
Now, say you hire an IT company to service your computer network. Hopefully the internet technology company is bonded.
This way, if one of their employee decided to steals from you, you could be reimbursed from the IT company’s bonding company.
After you are paid for your stolen items by the bonding company, another difference between insurance and bonds surfaces.
The bond holder – [in the scenario the IT Company owner] – is still responsible for repayment of the damages to the bonding company.
That right the bonding company will expect full repayment of any monies they pay out on the IT Company’s behalf.
Therefore, the IT Company is going to be more selective in their hiring process to minimize the risk — which in and of itself, is an extra layer of protection for your business as well.
But, there is more … since the bonding company will want to collect on the money they have paid out in a claim, the IT Company owner will need to qualify for a bond … qualifying is not required with insurance.
Depending on the type of bond you are seeking out, a good personal credit record and proof of assets may be required.
Fortunately, as a Cass County insurance brokerage firm, Mahar Insurance Agency has a large selection of bond from multiple companies, and some are much easier to qualify for than others.
So, to recap here are some major differences between Insurance and Bonds :
1. The Contract
Insurance: a form of risk management.
It is a 2-party contract between the insured and the insurance company.
This contract (insurance policy) assumes a guaranteed promise that the insured (your business) will be compensated by the insurance company in the event of a covered business loss.
Surety bond: a contract among at least 3 parties.
It is issued by one party (the surety) on behalf of a second party (the principal).
NOTE: The principal can be a service provider to your business. Or, it could be you if you are providing the service to another business.
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.
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.
Surety Bond: The premium paid is for the guarantee the principal fulfills his obligation.
Insurance: Losses are expected and insurance rates are adjusted to cover losses depending on many factors.
Surety Bond: Losses are not expected so surety bonds are issued only to qualified individuals or businesses whose projects require a guarantee.
Insurance: When a claim is paid the insurance company usually doesn’t expect to be repaid by the insured.
Surety Bond: A surety bond is a form of credit, so the principal is responsible to pay any claims.
Here’s a visual of the difference between business insurance and bonds :
Now, that you have a better understanding of the differences between business insurance and bonds, feel free to contact Mahar Insurance Agency to see a wide array to offerings from several insurance providers.
When you do, one thing you’ll discover is that there are many types of surety bonds, difference between surety bonds and fidelity bonds , and even times to consider using a surety bond versus a letter of credit in a business deal.
We will cover these things in future posts.
Also, feel free to leave comment, share ideas, and use the comment form to questions.