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What’s the Difference Between Bonds and Insurance? Part 1

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Risk is abundant in the construction industry. Risks can be associated with building, installation, or money. Insurance and bonds offer different kinds of risk protection in exchange for the general contractor’s payment. While bonds and insurance reduce risks for contractors and owners, bonds are generally meant to protect clients. Clients are attracted to a contractor who is bonded because they see a layer of protection. Insurance is meant to protect the contractor from the cost of accidents, floods, and things beyond their control.

What is the difference between insurance and bonds? A Raleigh construction lawyer explains the similarities and differences of insurance and bonds in this two-part article.

Application Process

Applying for construction insurance is fairly straightforward. It’s much like applying for other types of insurance, like health insurance, which you’ve probably done. For construction insurance, you normally answer some questions to receive a quote and choose the coverage that makes sense for your business.

When you apply for a bond, the company supplying the bond will have its own application criteria. This process is more involved than the insurance application process. Most surety companies will check if you have the right skills, abilities, and resources to perform the contract to the owner’s requirements before they will bond you.

Parties Involved in the Contract

Insurance is more straightforward than bonds are in this regard. It is an agreement between the contractor and the insurance company. Only two parties are involved in this agreement, which is familiar to most people. Contracts for bonds are more complicated.

Bonds involve three parties: the contractor (the principal), the project owner (the obligee), and the bond company (the surety). The general contractor agrees to pay a premium to the surety for the privilege of being bonded and promises to pay back the money the surety pays in case of a claim. In turn, the surety becomes obligated to the owner for the responsibilities of the contractor if the contractor does not perform their duties to contract or pay the subcontractors.

In part two of this article, we explain what happens when claims become involved in insurance or bonds.

To speak with a construction lawyer about a Raleigh construction bond or insurance claims, contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.