Contractor Insurance Coverage: “Insured & Bonded”

It is a common mistake that being “insured” (i.e. insurance) and being “bonded” (i.e. surety bond) are one and the same. While it is important that a contractor both be insured and bonded, it is equally important to understand the distinction between the two.

Insurance:  Generally speaking, the relevant type of insurance maintained by a contractor is liability insurance.  Liability insurance covers instances where the contractor damages the property of another.  (Note: This type of policy does not cover poor or unsatisfactory work by the contractor).  A liability insurance policy is a two-party agreement between the insurer (the insurance company) and the insured (the contractor), where the insurer promises to protect the insured against a covered loss or event.  As with automobile insurance, there is some expectation by the insurer that certain losses will be incurred by the insured, and therefore, the insured pays premiums to the insurer to cover those anticipated and covered losses.  In the event a claim is made against the policy by the insured to cover against a loss, the insured is generally not required to repay the amount paid by the insurer to the aggrieved party.  By way of example: contractor destroys scaffolding with a crane; contractor then notifies their insurance carrier of the accident, and the insurance carrier (presuming the injury is covered under the policy) pays the owner of the destroyed scaffolding.  The insured is not required to repay the insurance company, though the insured can be certain that its premiums will increase.  In short, an insurance policy is designed to protect the insured contractor from covered risks of loss.

Surety Bonds:    A bond, as opposed to an insurance policy, protects a party if the contractor fails to perform its duties on the project (performance bond) or pay for materials or its subcontractors (payment bond).  A surety bond is a contract between three parties: the bonding company (surety), the principal (contractor) and the obligee (owner).  A surety bond is procured by the principal (contractor) not for the purpose of protecting itself (as seen with an insurance policy) but rather to protect the obligee (owner) against the principal’s own non-performance or non-payment.  Although the principal pays the premium to the surety for the bond, there is an inherent expectation that the principal will perform its contractual duties and that the surety will have no involvement with the project.  However, by the principal paying the premium to the surety, it gives the obligee assurance that in the event of non-performance by the principal (contractor), the surety will step in and remediate the situation for the benefit of the obligee.  In the event the obligee is forced to call upon the surety to remediate the situation, the surety will later seek repayment from the principal for all sums expended to make the obligee whole.

In short, liability insurance protects the contractor against loss, while the bond protects third parties against the contractor’s non-performance or non-payment of subcontractors or suppliers.

The attorneys of HSLC have extensive experience in dealing with both insurance companies and sureties.  If you have additional questions, please contact our office.

By Cody R. Loughridge