What’s the Difference Between Construction Bonds and Insurance?


Bonds and insurance are both critical risk management tools for the construction industry, but they perform different functions and have distinct features.

A surety bond is a financial instrument. It financially guarantees that if the principal (the contractor) fails to meet contractual obligations (such as finishing a project, following through on a bid, paying subcontractors and suppliers, and so on), the surety (the bonding company) will pay up to the bond amount to the claimant for obligations on the principal’s behalf. Unlike insurance, which usually requires some type of loss to occur, a bond claim arises when a firm fails to meet its obligations.

Insurance is a contract between the insured (policyholder) and the insurance company. It protects an individual or company against claims related to specific risks or losses. In the event of a covered loss, the insurance company will compensate the claimant according to the policy’s limits, terms, and conditions.

A significant difference between the two is that an insurance policy pays on behalf of the policyholder, whereas a bond will pay for a covered claim and the principal will be required to reimburse the bond company for the amount paid.

Contractor Bonds

A Bid Bond ensures that, if a contractor bids on a project and is awarded the contract, but fails to fulfill all project terms and conditions, the bond will pay the claimant.

A Performance Bond ensures a contractor will follow all contract requirements and complete the task on time. If the contractor defaults on the contract, the surety can be called upon to complete (or find someone to fulfill) the job. This bond also requires contractors to stay within their budgets and satisfy specific timeframes.

A Payment Bond ensures the contractor will pay subcontractors and suppliers in full for any services and/or materials performed. If the contractor fails to make payment, a supplier or subcontractor can file a claim against the payment bond.

Contractor Insurance Policies

General Liability insurance covers third-party bodily injury and property damage claims. If a third party, for example, slips and falls on a job site and gets hurt, the insurance company will help pay for medical costs. If there is a lawsuit, the policy pays for covered legal defense costs, settlements, and verdicts up to the policy limits.

A Builders Risk policy provides temporary property insurance coverage for buildings under construction and renovation against various perils such as fire damage, vandalism, theft, and other hazards. Coverages vary by policy and insurance carrier.

Contractors Tools & Equipment protects contractor’s tools and equipment against property damage and theft from the job site and in transit. The type of policy is an Inland Marine Policy and typically includes a deductible.

Contractors Pollution Liability insurance provides property damage and bodily injury coverage for pollution incidents caused at a third-party job site as a result of work performed by a contractor.

Contractors Professional Liability insurance protects a contractor against errors and omissions claims from the rendering of professional services that occur at, or in connection with, a construction project. Generally speaking, a “Professional Service” is one that requires special qualifications, ie: Architect, Engineer, Surveyor, Construction Management, and others.

Workers’ Compensation insurance pays benefits to workers who are injured or become ill on the job. The policy can cover medical bills, lost wages, ongoing care and, in some cases, disability or death benefits to family members.


*NOTE: The insuring agreement in a policy sets out the covered perils, assumed risks, and nature of coverage that the insurance company provides to its insured in exchange for the premiums paid. Thus, the terms and conditions of the policy will dictate whether coverage exists and the nature of any potential benefits.

Please note that bonds are subject its terms and statutory requirements. Thus, benefits of the bond can only be afforded based on the terms of the bond and as provided by applicable state or federal law.