Updated 2026-11-01
Bonds are often sold by the same agencies that sell insurance and are regulated by state insurance departments, so people mix them up. The two work in fundamentally different ways.
Two parties versus three
An insurance policy is a contract between the insurer and the policyholder. A surety bond involves three parties: the principal who must meet an obligation, the obligee who requires the bond, and the surety that guarantees the principal's performance.
Who is protected
Insurance protects the policyholder against covered losses. A bond protects the obligee, and sometimes the public, if the principal fails to meet its obligation. A dealer bond, for example, protects car buyers and the state, not the dealer.
What happens after a claim
When an insurer pays a claim, it generally does not ask the policyholder to repay it. When a surety pays a valid bond claim, it expects the principal and indemnitors to reimburse it. A bond is closer to a line of credit than to insurance from the principal's point of view.
Why many businesses need both
A contractor may need a license bond for the licensing board and general liability insurance for property damage at job sites. A guardian may need a court bond and still keep homeowners insurance on the ward's property. Each serves a different purpose.