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Suretyship is not Insurance, Here's why.

16 May 2023

Many people assume a Surety Bond is a type of Insurance as they can be offered by Insurance Companies.

Suretyship is not Insurance, Here's why.

However, Suretyship and insurance are two distinct concepts, even though they share some similarities. While both provide financial protection, they operate in different ways and serve different purposes.

Suretyship is a contractual agreement between three parties: the surety company, the principal, and the obligee. The surety company guarantees that the principal will fulfill their obligations to the obligee. If the principal fails to do so, the surety company is responsible for compensating the obligee up to the amount of the bond.

Insurance, on the other hand, is a contract between two parties: the insurance company and the policyholder. The insurance company agrees to provide financial protection to the policyholder against specific risks or losses in exchange for a premium payment. If the policyholder experiences a covered loss, the insurance company is responsible for compensating the policyholder up to the policy limits.

One of the main differences between suretyship and insurance is the nature of the risk being covered. Suretyship covers contractual obligations, such as fulfilling a construction project or paying taxes, while insurance covers potential losses or damages caused by unforeseen events, such as accidents or natural disasters.

Another difference is the role of the surety company. In suretyship, the surety company is responsible for ensuring that the principal fulfills their obligations to the obligee. In insurance, the insurance company is responsible for compensating the policyholder in the event of a covered loss.

Additionally, the underwriting process for suretyship is different from that of insurance. Surety companies assess the creditworthiness and financial stability of the principal before issuing a bond, while insurance companies assess the potential risks and likelihood of a loss occurring before issuing a policy.

In summary, suretyship is not insurance because it covers contractual obligations, involves three parties, and the surety company's role is to guarantee the fulfillment of obligations, rather than compensating for losses or damages.

Fo help with your next Surety Bond please contact our team.

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