If you own a construction company or work as a contractor, you may wonder whether you need insurance or a surety bond. The answer is simple: you need both.
Both documents show that you are a trustworthy professional who can handle work responsibly and protect your clients. However, they work in different ways.
What Is Construction Insurance?
Construction insurance protects your business from financial loss due to accidents, damages, or lawsuits. An important distinction to understand is Surety Bonds versus Insurance—while insurance protects your business from unforeseen events, surety bonds are guarantees that your business will fulfill its obligations. It covers you, your property, your workers, and third parties like clients or the public.
Here are some common types of construction insurance:
- General Liability Insurance: Covers injuries to others or damage to someone else’s property at your construction site.
- Commercial Property Insurance: Protects your tools, equipment, materials, and office from damage or loss.
- Business Owner’s Policy (BOP): A combined insurance plan that covers both general liability and property insurance in one package. It may also include business interruption insurance, which helps if your work stops temporarily.
- Inland Marine Insurance: Covers tools and materials while being transported or stored away from your site.
- Builder’s Risk Insurance: Covers buildings under construction if they are damaged by fire, wind, or theft.
- Workers’ Compensation: Required by law in most states, this insurance pays for medical care and lost wages if your employees get hurt on the job.
Insurance policies usually come with a monthly or yearly premium, and they may include a deductible, which is the amount you pay before the insurance covers the rest. If a covered incident occurs, your insurance company will handle your legal defence and cover any related damages or legal expenses.
What Is a Surety Bond?
A surety bond is a guarantee that you’ll complete a job as promised. It protects the client, not your business.
A surety bond involves three parties:
- Principal – You (the contractor)
- Obligee – Your client
- Surety – The company that issues the bond
If you fail to complete a project or provide unsatisfactory work, your client (the obligee) has the right to file a claim. The surety company will investigate and may pay your client. However, you must repay the surety for the full amount.
Key Differences
- Insurance protects your business. A bond protects your client.
- Insurance claims are filed by you. Bond claims are filed by the client.
- Insurance pays and absorbs the loss (except deductibles). Surety pays but you must repay them.
How Costs Are Calculated
The cost of insurance and bonds depends on several factors like the size of your company, location, type of work, claim history, and your credit score. Good credit can lower your bond costs. No claims history can reduce your insurance premiums.
Conclusion
Clients prefer to work with contractors who are both insured and bonded. It shows professionalism and responsibility. If you haven’t yet set these up, it’s wise to get help from a broker to find the right coverage for your business.
