To the casual observer, the difference between insurance and a surety bond for a contractor may seem almost imperceptible, but to the seasoned professional, it may be the one factor that could make the difference in one contractor getting a job over another.

Here’s an easy way to tell the difference – who does each protect?

Insurance protects the business owner from financial loss when a claim occurs. Surety bonds protect the owner of the project and the suppliers to the project by reimbursing them when a claim occurs.

Construction insurance protects the business owner from a loss. In exchange for the premium that is paid for coverage, the insurance provider will pay for certain lawsuits or events that would otherwise leave your business in a financial bind. If someone damages equipment at the job site, or someone is injured on the job, insurance will help recoup those losses.

A surety bond is often required in the construction industry to ensure that the principal follows all of the specifications of the contract and pays to subcontractors and suppliers as well as regulations, or laws governing your industry. Surety bonds also act as a safeguard against poor performance or dishonest behavior.

For example, if a contractor fails to complete the promised work, the surety bond would reimburse the owner with the funds they need to pay someone else to complete the specified job.

Did you know there are also more parties involved in a surety bond then an insurance contract? Unlike construction insurance, which is a contract between two parties, a surety bond is a contract between three parties; the principal, Obligee and the Surety.

The principal - That's the business or the individual contractor.

The obligee - This is typically the local, state, or federal authority that requires the surety bond in the first place. The obligee can also be the General Contractor.

The surety provider - This entity (like Allstar Surety Bonds) underwrites the bond and ensures that the principal will do his or her best to meet the contractual conditions required by the obligee.

For prospective customers, knowing that a contractor has a surety bond establishes trust, gives them an extra layer of assurance that the job will get done, and will comply with federal, state and local regulations. That’s why consumers, rightfully so, place a lot of faith in companies that proudly advertise as "bonded and insured."