Types of Surety Bonds and How a Bond Differs from Insurance
You already know the $25,000 license bond. Here's the rest of the bond picture — and the classic exam distinction between a bond and insurance.
1. A bond is NOT insurance — the three parties
A surety bond is a three-party agreement:
| Party | Who it is |
|---|---|
| Principal | the contractor (buys the bond, promises to perform) |
| Obligee | the protected party — here, the public/consumers (via the state) |
| Surety | the bond company that issues the bond and pays valid claims |
The key difference from insurance:
- Insurance is a two-party deal (insured + insurer). The insurer absorbs the loss — you don't pay it back.
- With a bond, the surety protects the obligee, not the contractor. If the surety pays a claim, the contractor (principal) must REIMBURSE the surety. A bond guarantees your performance; it is not protection for you.