Have you been told that a surety bond is the same as insurance? Or that insurance is better than a surety bond in the field of construction? There are contractors, who feel, that construction bonds are not necessary in order for their business to succeed. Unfortunately, these are often the same contractors who do not see as much business growth as bonded contractors. All public construction projects required surety bonds. Since the public construction sector is a reliable industry it is an industry worth working in. In addition, in recent years, many private sector construction jobs have also began to require surety bonds.
What are the main characteristics of insurances and surety bonds?
First, we would like to debunk the myth that bonds and insurances are the same thing. Many people assume, incorrectly, that the term “bonded” and “insured” are interchangeable. In the case of the contractor, an insurance policy usually refers to liability insurance or workers’ compensation. They do not protect the project owner, but rather the workers. For many clients, hearing that a contractor is also bonded, gives the project owner confidence that they will be protected, in the case that the contract is not satisfactorily completed.
A surety bond is a contractual agreement between three parties: the project owner, the contractor or business and the surety bond producer. Basically, the project owner (being the homeowner or a public entity) asks for a surety bond from the contractor. The contractor contacts their surety bond producer, who looks over a multitude of documents and evidence, and assures the project owner that they are confident the contractor can fulfill the contractual obligations. If, by some off chance, the contractor defaults on the contract, the surety bond producer will compensate the project owner in order to complete the project. This is known as filing a claim. Then, the surety bond producer will seek reimbursement from the contractor.
But this is not to say that insurances are not necessary, rather a company is stronger when it uses bonds and insurances to work together. Having both speaks volume as to the competency of the construction company.
Do you still have questions? Feel free to contact us, at Surety Bond Professionals, as we have decades of knowledge in the surety bond field and some of the best relationships with underwriters in the industry. We can help to communicate to your future clients the financial confidence and competency of your construction business.