What is a Surety Bond and How it Differs from Insurance – Real Estate

The term bonded and insured is common in the world of real estate business and many other industries. However, the two types of coverage – bonds and insurance – are not one of the same. Instead, being bonded is part of the licensing requirements for certain professionals, including mortgage brokers, as it offers a way to protect customers. Insurance, on the other hand, is often an optional strategy for protecting the business or the professional. 

Here’s a breakdown of how a surety bond differs from insurance in terms of who’s involved, how one obtains coverage, the pricing, and the specific way claims are handled.

The Parties Involved

The first way a surety bond differs from insurance involves the parties to which each type of protection benefits. With a surety bond, a contract includes three parties: the surety agency, the person or business holding the bond (the principal), and the person or organization requiring the bond (the obligee). This contract guarantees that you as the bondholder will fulfill your obligations to the obligee, and the surety agency will pay claims on your behalf if you fail to do so.

Insurance, on the other hand, involves just two parties. An insurance contract includes you or your business as the insured party, and the insurance company as the provider. This agreement creates a transfer of risk away from you or your company to the insurance company who pays insurance claims if something goes wrong.

Providers of Bonds and Insurance

Surety bonds are offered by surety agencies, and bondholders have many options for selecting their surety provider. Strong surety agencies will have experience in your industry, such as real estate, and a knowledge of the specific types of bonds you may need. An insurance company offers insurance coverage, and again, there are many different providers available. It is also important to work with an insurance company that has expertise in the specific type of business insurance you need, such as general liability coverage.

The Pricing

Surety bonds and insurance also differ in pricing, although both are based on a form of risk assessment. Surety agencies review a new bond application under a lens of how likely the bondholder is to have a claim made against him or his business. This risk assessment involves taking a close look at the business experience in the industry, your claims history with other surety bonds, and your personal and business finances.

One of the most important driving factors of surety bond pricing is your credit, as this represents how much of a risk you may be in when it comes to paying claims. If you have bad credit or no credit, your surety bond pricing will be higher. Those with good credit will pay less for their surety bond cost. Another factor of pricing is the amount of the bond needed. A mortgage broker may need a bond of $50,000, but the cost of the bond is not that full amount. Instead, based on your credit and your bond amount, the total price you pay is between 1 and 10% of your bond amount.

Insurance is priced based on your risk of claiming in the future. This risk assessment may depend on the location of your professional activities, the revenue or value of your business, and your claims history with other insurance policies. High-risk applicants will pay more than low-risk applicants for a new insurance policy, as will those with minimal industry experience. The premiums paid for insurance is also dependent on the amount of coverage purchased.

Claims and Coverage

Additionally, surety bonds and insurance are different in who and what they protect, as well as how claims are managed. With surety bonds, the protection extends to the obligee or the customer of the business or profession. When a claim is made against a bond because of bad business practices or non-compliance with state or federal regulations, the surety bond agency pays the claim amount up to the total bond in place. However, the bondholder repays the claim amount back to the surety provider over time.

This differs from insurance significantly. Insurance policies pay successful claims to the insured should damage or financial loss occurs. These benefits paid to the policyholder do not need to be repaid, but the cost of insurance may increase if many claims are made over the life of the policy. Because of this structure, insurance is meant to protect you and your business – not necessarily your customers or clients.

As you can see, being bonded and insured are two different strategies for protecting you and your business. Surety bonds are often required as part of the licensing process, while insurance may be an optional addition to add more protection. It is important to know the differences between surety bonds and insurance, including who’s involved, how they work, and the cost, so you can make an informed decision about what’s best for you and your business.

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

*** SPECIAL ALERT — June 27, 2020 — THREE of this Year’s Motley Fool Stock Picks Have Already Doubled! ****

We have been tracking ALL of the Motley Fool stock picks since January 2016. That’s 4+ years, 54 months and 108 stock picks. As of Friday, June 26th 3 of their 12 2020 stocks picks have already doubled (TSLA, ZM, SHOP). In addition, 4 of their 2019, 8 of their 2018, 7 of their 2016 and 10 of their 2016 picks have also doubled. Best of all, over these 54 months, the average stock pick is up 111%. That beats the SP500 by an average of 87%. And that’s even accounting for all of this COVID mess that has wreaked havoc on some stocks but presented opportunity for other stocks. THAT is how the Fool does so well!

  • Shopify (SHOP) – April 2, 2020 pick and it is already up 163%
  • Zoom Video (ZM) – March 19, 2020 pick and it is already up 107%
  • DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 26%
  • Tesla (TSLA) picked January 2, 2020 before the crash and it is up 123% compared to the SP500 -7% so it is ahead of the market by 130%
  • HubSpot (HUBS) picked December 5, 2019 and it is up 46%
  • Netflix (NFLX) picked November 21, 2019 and it is up 42%
  • Trade Desk (TTD) picked November 11, 2019 and up 111%
  • Zoom Video originally picked Oct 3 and it is up 234%
  • SolarEdge (SEDG) picked September 19, 2019 and it is up 44%

Now, no one can guarantee that their next picks will be as strong, but our 4.5 years of experience has been super-profitable. They also claim that since inception, their average pick is up 424% and now we believe them. You sure don’t want to risk missing out. Many analysts are saying that we have passed the bottom of this COVID crisis and stocks will recover quickly. So make sure you have the best stocks in your portfolio.

Normally the Fool service is priced at $199 per year but they are currently offering it for just $99/year if you click this link

CLICK HERE to get The Motley Fool’s Stock Picks for just $99 per Year! 




GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW

(before it’s too late)

Leave a Reply

Your email address will not be published. Required fields are marked *