Surety bonds vs contractor insurance: What is the difference?

Do you know the difference between a surety bond and contractor insurance?

These two concepts can be easily mixed up, considering the complexities of insurance and bonding, but you should know they serve two very different purposes for contracting businesses.

The difference boils down to whom is protected.

How a surety bond protects

A surety bond is a contract that expresses one party’s promise to answer for another party’s failure to do something as promised. If the business acquiring the bond (the principal) defaults on its project obligations in any way, it may be required to pay monetary damages to the entity requiring the bond (the obligee), such as an owner or a government agency.

By requiring a contractor to purchase a surety bond from a broker and surety company like UFG and undergo a rigorous underwriting process, the obligee is protected from unfinished or substandard work. There is no claims benefit to the bond purchaser; rather, it serves as proof of their ability to execute a project on time and on budget.
Learn more about the basics of surety bonds and how businesses use them here.

How contractor insurance protects

Contractor insurance is an umbrella term used for a range of business insurance policies commonly held by those in the construction industry. It’s designed to protect policyholders from common risks, and pays for damages and settlements in the event of a covered loss.
In this way, insurance is different from bonds, which are written with the expectation that there won't be a claim. 

Contractor insurance typically includes a mix of foundational coverages, like general liability and inland marine, to more specific endorsements selected for a company’s needs.

Contractor insurance can encompass:

• General liability coverage.
• Inland marine.
• Errors and omissions (E&O) insurance.
• Equipment breakdown coverage.
• Business income interruption coverage.
• Commercial auto insurance.
• Workers compensation.

You can read more about each of these coverages here. Artisan contractors in the plumbing, electrical and HVAC sectors may want to consider UFG's ArtisanPro contractor insurance, which combines broad property and liability insurance, including valuable business income protection. Optional endorsements include contractors installation, tools and equipment coverage and increased liability limits. 

Surety bonds vs. contractor insurance

There are plenty of other little differences between sureties and contractor insurance that go beyond who is protected. See our chart below for a quick reference of the finer details that set these two tools apart.

	Surety bonds	Contractor Insurance
Parties	Three (principal, surety, obligee)	Two (insurer and insured)
Protects	Obligee (project owner)	Policyholder
Purchased by	The contractor	The contractor
Claims	A default is when a principal fails to meet their  obligations, and the surety must step in.	Policyholders file a claim after a covered  incident to receive payment.
Underwriting	Underwritten with the intention that there will  NOT be a loss.	Underwritten with goal of minimizing losses  for each insured.
Purchase  cycle	Can be one time or recurring.	Renewed semi-annually or annually.
Premiums	Varies based on contract value, typically  0.5%-3% of contract total.	Premiums based on risk and scope of  coverage.

What unites surety bonds and contractor insurance is their ability to provide confidence and stability in a volatile industry. By establishing a strong relationship with your surety and insurance providers, you'll be ready for whatever the economy and your clients throw your way.

If you're still feeling confused, your UFG Insurance agent can help you navigate the worlds of insurance and bonding and select the best surety bond and contractor insurance for your needs. Click here to find an agent today!