Contractors are required to be bonded and insured. Projects usually require general liability insurance and worker’s compensation insurance. Projects can also require a bid bond, a performance bond and a payment bond.

But how are each different and why are each required? Surety bonds and insurance are both a form of risk management meant to protect against a financial loss.

The biggest difference between insurance and surety bonds is that when a claim is made on a bond, the contractor is responsible to reimburse the surety for any losses. Generally, when a claim is made on a contractor’s insurance policy, the contractor is not required to reimburse the insurance company for its losses.

Insurance

In exchange for a premium, insurance provides financial coverage related to damages incurred by covered individuals or entities during certain events enumerated in the insurance policy. Typical examples include general liability insurance, commercial property insurance and workers' compensation insurance:

• General liability insurance is broad insurance coverage that helps protect businesses from claims that happen as a result of regular business operations. Claims for bodily injury, property damage and personal injury are generally included.
• Commercial property insurance covers the loss to property such as structures, buildings, equipment, inventory, tools and fixtures. Common claims on a contractor’s commercial property insurance policy include claims to replace damaged or stolen tools, equipment and other inventory.
• Workers' compensation insurance is generally required in construction since the industry is considered high risk. The insurance covers costs associated illnesses or injuries that were caused on the job. Typical claims include medical bills, a portion of lost wages and certain death benefits.

Surety Bonds

Surety bonds are a form of security that contractors typically provide to owners and other project entities to insure against certain risks. Similar to insurance, a premium is paid for the bond and is usually paid by the project owner. But unlike insurance, contractors must reimburse the surety company for its losses, including the amount of the claim and any expenses (including attorney’s fees) that the surety incurred in processing the claim. Typical bonds include bid bonds, payment bonds performance bonds and license bonds:

• The bid bond guarantees that should the bidder be successful, the bidder will execute the contract and provide the required surety bonds. Bid bonds are meant to prevent contractors from submitting inappropriate bids to win a project.
• The payment bond guarantees that a contractor or subcontractor will pay their subcontractors, material suppliers or laborers for the work and materials provided. Payment bonds on public works projects replace the security a mechanic’s lien traditionally provides on private projects.
• The performance bond is issued by the contractor to the owner and guarantees that a contractor will complete the project. Most typically, performance bonds are utilized when a contractor declares bankruptcy or is default. The surety is responsible for ensuring the cost of completion of the project (up to the amount of the bond).
• The license bond guarantees that contractors will operate their business in compliance with the regulations related to their contractor’s license. These bonds protect the public and other construction entities from fraudulent practices.