COMPARE: SURETY TO INSURANCE

(February 2023)

INTRODUCTION

This is a summary of Contract Surety distinctions compared to its insurance counterparts. Surety bonds and insurance policies are similar, but there are some very distinct differences. Besides having different contract language, they differ in the coverage they provide. The following chart identifies the most important differences.

Contract Surety	Insurance
Principal/Obligor/Contractor	Similar to liability coverage because only the actions of the party that pays the premium can trigger a claim from the obligee
Owner/Obligee	Similar to a first party insured or a third party claimant in that the insurance company compensates for covered loss. However, the only loss a surety contract pays is one where principal does not perform according to contract terms.
Surety	Insurance Company
Penalty/Penal Sum	Limits of Liability/Limits of Insurance
Three-party (Tripartite) Agreement	Two-party Agreement
Term of Obligation is indefinite and lasts until the contractual obligation is complete. Cancellation is not an option.	Term of Obligation is for the specified policy period or term. Cancellation and non-renewal rights are part of the policy.
What is covered? Performance	What is covered? The perils or causes of loss listed in the policy or coverage form
Is subrogation possible? The surety may subrogate against the principal for any loss paid to obligees, subcontractors, and material suppliers	Is subrogation possible? The insurance company may subrogate against only third parties
Is indemnity available to surety for loss caused by principal/insured? Yes. The surety can pursue the officers, stockholders, corporations, and affiliated partnerships on behalf of principal.	Is indemnity available to insurer caused by principal/insured? No