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What is The Difference Between Being Bonded and Being Insured?
The difference between being bonded and being insured is a rather small one, but an important one. First, one needs to know the features, characteristics, benefits and drawbacks of a surety bond and an insurance policy. Only then, can a person understand the differences between both these concepts. Later, we will also highlight the differences between an insurance policy and a surety bond.
Let us first briefly understand the concepts of insurance and then the concept of a surety bond, then we can move forward and highlight the difference between the two, and finally we will give examples for both concepts.
- Understanding surety bonds and insurance
- Difference between surety bonds and insurance
- Examples of surety bonds and insurance
Understanding surety bonds and insurance
- Understanding the concept of insurance: An insurance policy is an agreement between the policyholder and the insurance company. This agreement indemnifies the policyholder against pre-specified losses.
- Understanding the concept of surety bonds: A surety bond in an agreement between two parties. It does not involve an insurance company. A surety agreement states that the bond holder will be indemnified up to a pre-specified amount in the event that the person issuing the bond defaults in their commitments.
Difference between surety bonds and insurance
Although similar, there are some notable differences between being bonded and being insured.
Insurance | Surety Bond | |
What are some types? |
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Who are the parties? | Generally, the parties are an insurance company and an individual. | Generally, both parties are either individuals or entities. |
What is the extend of the indemnification? | Up to sum assured | Up to the amount mentioned on the bond |
Who issues this generally? | Insurance companies and reinsurance companies | Contractors, private and public companies, individuals. |
Examples of surety bonds and insurance
Finally, let us cement the concepts of surety bonds and insurance, and highlight the differences between the two through a couple of easy to understand and simple real world examples.
- Example 1: Let us assume that Mr. Manohar wants to purchase a life insurance policy to secure his family after his passing. He contacts his financial advisor and the advisor refers him to an insurance agent. Mr. Manohar, now purchases a life insurance policy from a life insurance company. This is an example of an insurance policy, where the agreement is between an individual and an insurance company.
- Example 2: Let us assume that a Cooperative housing society in Mumbai wants to repair the society roads. They hire a civil contractor for the job but they insist that the contractor furnish the society with a surety bond that states that he will complete the job safely, efficiently, and within the specified time period. If he does not adhere to the commitments written down on the surety bond, the contractor has to compensate the society for any financial damages caused. The terms of the bond and amount specified are variable and need to be agreed upon by both parties.
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