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What is a Difference between Bonded and Insured?

performance bond application

The difference between bonded and insured can seem to be relatively small at the beginning. However, once you understand the difference between bonded versus being insured, it is quite a large gap. Most of us understand what it is to be insured. Being insured is entering into an agreement with an insurance company to share the risk pool among all parties. It is assumed that the underlying matter that is being insured will occur somewhere is the pool. So, the pricing reflects that certainty. For example, if there are 100,000 persons that have fire insurance, the underlying insurance model shows that approximately 20 will have a fire. Becuase it is impossible to know WHO will have the fire, all persons pay the same premium.

Being bonded is different. Bonds are not prices assuming that there will be losses. Instead, each bond is written with the assumption that there will not be a claim on the underlying contract that is being bonded. So the difference between bonded and insured is quite large. If bonds were priced according to an insurance based model, they would not cost a mere 3% of a contract job, but be closer to 15-20%. This would make it impossible for commerce to happen.