L&T Blog

What’s The Difference Between Construction Insurance and Bonds?

December 19, 2022

It would be nice if all construction projects were smooth, seamless and on-schedule every time, but considering a host of liabilities — like craftsmanship errors, unfulfilled contracts and supply chain issues — this often isn’t the case.

With construction dispute claims rising year over year nationwide, it’s important for contractors to protect all parties involved from financial risk.

According to Arcadis’ 2021 Global Construction Disputes Report, the average cost of a construction dispute in North America has more than doubled from $18.9 million to $38.5 million since 2020, with dispute lengths averaging 14 months.

To avoid this legal mess and stay focused on growing your business, presenting proof of construction insurance and surety bonds are key. Both documents help ensure that neither you, nor those who hire you, are held liable for any issues.

But what is the difference, and why are they important?

What is Construction Insurance?

Construction insurance is an umbrella term for all the individual policies required to protect your business from financial risks. This works like any other type of insurance, and most contractors and companies opt for the following:

General Liability Insurance: Covers third-party property damage and/or bodily injuries

Commercial Property Insurance: Covers your construction site, tools and supplies

Business Owners Policy (BOP): Covers general liability and property insurance in one package

Builders Risk Insurance: Covers damage or loss to buildings being constructed or renovated

Inland Marine Insurance: Covers tools and equipment transported overseas

Workers Compensation: Covers medical bills and wage losses for injured or ill employees

Legal guidelines go into further detail about which of these are must-haves for your business, but when in doubt, it’s better to have more than less to stay covered.

What is a Surety Bond?

Unlike construction insurance, surety bonds protect the parties you work with instead of your business. You strive to center your firm around integrity and quality, but sometimes poor service and subpar performance come into play.

Bonds affirm that your clients and customers won’t have to pay for mistakes, which helps keep your company’s reputation strong. Surety bonds are signed by three parties:

Principal: This party, which is typically you and your business, purchases the surety bond and agrees to deliver all services outlined in the contract.

Obligee: This is the individual or business that hires your company. They receive the payout if you fail to fulfill your contractual obligations.

Provider: The provider is the insurance or surety underwriter who agrees to cover the obligee’s losses in the event of a dispute.

Construction Insurance vs. Bonds

Now that you know why both construction insurance and bonds are essential for keeping your business and clients risk-free, let’s recap the differences:

Structure: Construction insurance is a contract between the insurer and the insured. A surety bond is an agreement among the principal, obligee and surety provider.

Protection: Insurance protects your business, and bonds protect your customers.

Claims: Your company files claims with insurance, and your customers file claims with surety bonds.

If you need additional assistance navigating insurance and bonds, the experts at Lovitt & Touché can guide you toward industry-specific solutions fit for your business. Learn more about our full suite of construction insurance offerings.