While both insurance and a surety bond provide protection against financial loss, a surety bond differs from insurance.
A surety closely resembles banking. A bank makes a loan and charges interest. It fully expects to be repaid. If not, the bank has rights through its loan agreement to seek reimbursement from its client. A surety writes a bond and charges a premium, or fee, and fully expects the principal to perform its obligation. If not, the surety has rights through its indemnity agreement signed on behalf of the business, and personally, to seek reimbursement for money it has paid to cover losses, expenses, and attorney fees.
A surety is a three party contract, the bond is not for the benefit of the insured, but for the benefit of the obligee (the third party). The bond transfers risk from the obligee to the principal (second party), the surety, if the principal fails to pay or perform per its obligation.
The obligee is the employer, who pays for, and is protected by, the bond.
The principal is the employee who has the duty to be honest or to do something.
The surety is the insurance company that provides the guarantees.
Through selection, pre qualification, and other underwriting measures, a surety does not expect losses, thus premium is not intended to cover loss. Premium is more of a fee for providing financial “backing” for the principal.
While a surety may ultimately have to pay a loss, through the terms of the General Indemnity Agreement the principal signs in its business capacity and personally (spouses also sign) prior to the issuance of any bonds, the principal agrees to reimburse the surety for all loss, costs, and expenses incurred as a result of remedying an obligation should the principal fail to do so.