A large majority of the general population has never even heard of surety bond, so it is no surprise that those who have heard of them really don’t understand what they are. Surety bonds are considered a branch of the insurance industry but in reality, they are not insurance.

Surety professionals are the first to point out that surety is a three party relationship while insurance is a two party relationship. Most people would respond to that explanation with a long, blank stare.  Perhaps a good old fashioned Venn diagram will make it easier to visualize….
 

In essence, insurance is a contingency plan. If something goes wrong, someone will pay to fix it (that is, of course, after you pay the hefty deductible, prove that the water damage is from water from the sky and not the ground, and that you did buy coverage for acts of god). The policy is between the insurance company and the principal (policy holder). Insurance underwriters expect that there will be a loss. It’s built into the policy and you pay for that risk to be transferred to the Insurance Company.

Surety, on the other hand, is a guarantee that the Principal (person getting the bond) will do something: follow a rule/regulation/law; perform a contract; pay certain taxes; supply a certain item; etc. The bond is a guarantee from the Surety to the Obligee (the entity requiring the bond) that the Principal will meet their obligation set forth in the bond.  A surety bond protects the Obligee and not the principal.

Also, unlike Insurance, the surety company does NOT expect there to be a loss. They go to great lengths to ensure that the Principal can and will meet the obligation of the bond.  In this sense, Surety often acts as a prequalification tool.

So, what exactly are you paying for when you get a bond? You’re paying for the Surety’s backing. Basically if you obtain a bond, the Surety is “vouching” for you and you pay for that service.

Simple, right?