Bonds vs Insurance

Bonds vs Insurance

October 30, 2020
Share |

Bonds vs Insurance ... is there a difference?  Yes, there are big differences. An auto or home insurance policy says that if certain things happen, then you could be able to recover payment for the damages you have suffered. Now a bond is a very different item. A bond is actually a credit instrument. I know that may sound surprising, but a bond is a form of credit. 

There are 3 parties to a surety bond. There is the Surety that issues the bond. There is the Obligee, the person or entity that is asking for the bond. And lastly there is you, the Principal that is requesting the bond to satisfy a contract. 

A bond is usually required as a financial guarantee for a service, a project or a court. When you apply for a bond what happens is the Surety looks at your application and evaluates it (you) to be sure it meets their requirements. The Surety is in essence putting up a C.D. with your name on it to guarantee a contract. Now in Texas we are a community property state, and because of that both spouses have to sign the bond application. If there are multiple partners then all spouses are required to sign. The reason for the signature is that if you default on your bond, the Surety will seek full restitution for the bond funds they have posted on your behalf. So spouses have to agree in advance to a potential default recovery action from the Surety.

Who needs bonds? Well if you are involved in a city, state or federal project they usually require the project to be bonded against a default. A repair or construction project may require sub-contractors to provide a Performance Bond against them going out of business during the project. And then there are some court proceedings that can require a bond.