What’s the Difference Between Construction Insurance and a Surety Bond?

Construction insurance and surety bonds both provide different types of protection on a construction project, but a common misconception is that a surety bond is another type of insurance. So, what is the difference between the two?

What is Construction Insurance and How Does it Work?

Construction insurance is an agreement between two parties:

• The construction business
• Insurance company

In this arrangement, the business pays a premium and the insurance company takes on the risk of any claims. If a covered claim is made, the insurance company is financially responsible for paying out on that claim. Some examples of common construction insurance policies include general liability insurance, workers compensation insurance, inland marine, and builders risk insurance.

What is a Surety Bond and How Does it Work?

A surety bond is an agreement between three parties:

• The principal (the party that purchases the bond)
• The obligee (the party requiring the bond)
• The surety provider (the company who underwrites the bond)

A surety bond guarantees the principal’s compliance, payment, or performance of an act. The principal pays a bond premium and in exchange, the surety provider provides a line of credit to guarantee payment to the obligee in the event of a claim. If a claim is filed and the principal is found by the surety to have failed to meet the bond’s requirements, the principal is financially responsible for repaying the cost of the claim to the surety.

What is the Difference?

With construction insurance, the insurance company is responsible to pay out on any covered claims. This is not the case with a surety bond. A surety bond provides protection to the obligee. If a surety claim is filed the principal is responsible for paying the claim costs, not the surety provider. 

Our industry specialists are here to ensure that you have the right coverage in place and can help with both construction insurance and surety needs. Reach out to one of our local AssuredPartners Construction experts today and let them guide you to the best plan.