This is a summary of
Contract Surety distinctions compared with its insurance counterparts. Surety
bonds and insurance policies are similar in many ways but are also different in
some respects, some of which are very important. Besides having different
contract language, the forms differ to the extent of the coverage provided. The
chart below identifies the most important differences.
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Contract Surety
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Insurance
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Principal/Obligor
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Similar to liability
coverage in that the insured is responsible for paying the premium and is
also the party performing the work that triggers a claim from the obligee
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Owner/Obligee
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Similar to a first party
insured or a third party claimant in that the insurance company compensates
for any loss as long as the loss is caused by the principal not performing
according to contract terms
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Surety
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Insurance Company
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Penalty/Penal Sum
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Limits of Liability/Limits
of Insurance
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Three-party
(Tripartite) Agreement
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Two-party Agreement
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Term of Obligation is
indefinite and lasts until the contractual obligation is complete
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Term of Obligation is
for the specified policy term or period
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What is covered?
Performance
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What is covered?
The perils or causes of
loss listed in the policy or coverage form
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The Surety may
subrogate against the principal for any loss paid to obligee, subcontractors
and material suppliers
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The insurance company
may subrogate only against third parties
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Is indemnity available
to surety/insurer for loss caused by principal/insured?
Yes. The surety can
pursue the officers, stockholders, corporations, and affiliated partnerships
on behalf of principal.
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Is indemnity available
to surety/insurer caused by principal/insured?
No.
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