What’s the difference between a surety bond and general liability insurance?
A surety bond backs a specific obligation to another party. General liability insurance generally protects your business against covered third-party claims for injury or property damage. They serve different purposes, and you may need both.
How a surety bond works
A surety bond involves three parties: the principal (the business buying the bond), the obligee (the party requiring it), and the surety (the company backing the obligation). The bond helps protect the obligee or others covered by its terms if the principal fails to meet the bonded obligation.
For example, a licensing authority may require a contractor to obtain a license bond. If a valid claim is paid, the principal generally must reimburse the surety under the indemnity agreement. The bond amount is not the same as the premium paid to obtain it.
How general liability insurance works
General liability insurance generally covers a business for certain third-party claims, such as bodily injury or property damage arising from its operations. For example, if a visitor slips at a business location and claims an injury, the policy may respond, subject to its terms, exclusions and limits. It can also cover defense costs for covered claims.
Unlike a surety bond, a liability policy is designed to transfer covered risk to the insurer; the insured generally does not reimburse the insurer for covered payments, though deductibles or other policy provisions may apply.
Key differences
- Purpose: A bond backs an obligation; liability insurance addresses covered liability claims.
- Who benefits: A bond protects the obligee or other parties covered by its terms. Liability insurance protects the insured business against covered claims.
- Parties: A bond involves a principal, obligee and surety. Insurance is a contract between an insured and an insurer.
- Claims: The principal generally reimburses the surety for a paid bond claim. Covered insurance payments generally are not repaid by the insured.
Do you need both?
Possibly. A license, contract or government agency may require a specific bond, while a client or contract may also require liability insurance. One does not automatically satisfy a requirement for the other. Check the exact wording of your requirements and discuss insurance coverage with a licensed professional.
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