INSURANCE BONDS

Bond insurance, also known as "financial guaranty insurance", is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by the issuer of the bond or security.

Here are 3 major differences between a bond and an insurance policy;

1. Parties involved in the contract. There are three parties involved in the bond contract. The first party is the company requesting the bond, referred to as the principal. The second party is the customer, referred to as the obligee. And the third party is the surety company. The obligee transfers the risk to the surety company that the principal will not fulfill their contractual duties.
2. Financial restoration after a loss. Losses are not expected to occur when a surety bond is issued. However, if a loss occurs, the principal is expected to fully restore the surety company for any financial loss incurred. Before a bond is issued, the underwriter requires proof that the principal has the financial means to reimburse the surety company should a loss occur. Thus, a bond acts like a line of credit for the principal.
3. Premiums and/or fees paid for the coverage. When a surety bond is issued, a premium or service fee is paid by the principal to the surety company. The service fee allows the principal to use the financial backing of the surety company. If there is a loss, the surety company pays for the loss, but requires the principal to reimburse all funds that have been paid out.