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There are many surety bonds that exist.  Some of these bonds are in some serious niche industries.  However, a good surety bond can really reduce the amount of risk to your company.  These risk mitigators, along with specific types of insurance, can be really beneficial to your overall financial well being.

See the article below for some good advice on the difference between a surety bond and E&O Insurance.

How Protected Is Your Business? Learn How to Safeguard It With Bonds and E&O Insurance

How Protected Is Your Business? Learn How to Safeguard It With Bonds and E&O Insurance

When I first started my freelance career, I thought it was going to be a piece of cake (didn’t we all?). Once I got into the thick of things I noticed that every question I received an answer to only caused me to ask 10 more questions. Sound familiar?

This is commonplace for anyone going into business for the first time. One of the most confusing things for me in the beginning was understanding what it meant to be “bonded and insured”–or at least the difference between being “bonded” and being “insured.” I knew of both, thanks to my business career, but did not fully understand each until later on in my freelance career.

I have to admit, I had both a surety bond and insurance (errors and omissions insurance, or EOI for short) before I fully understood the purpose of each one. Thankfully, I have never had to use either, but will continue to have them in order to protect myself and my business. Hopefully I will be able to help you out here by providing my understanding of each.

So What Is a Surety Bond?

Lucky me. Years ago I received a job inside a new government agency and was given the keys to the castle. Only problem? I had no blueprints, instructions, or anything to go on. Hell, I wasn’t even sure where the front door to the castle was.

I won’t bore you with my job description, or make you feel sorry for me for working long hours. I’ll simply let you know that my agency needed a notary to assist with what we were doing.

Again, lucky me, I got to become a public notary. I figured I just needed to complete a simple form and I would be good to go, right? WRONG!

One thing about business you learn from the start is that government involvement is always accompanied by mountains of paperwork. My “simple form” turned out to be several pages of questions, personal information, and a checklist for additional forms needed to accompany my application. One of those additional forms? You guessed it. A surety bond.

I had no idea what one was or why I needed it, other than the fact it was on the list of items I had to turn in with my application. My company paid for my bond and off I went to turn in my application.

I still did not have any idea what a surety bond was and why I needed it, but I am proud to say I had one. Bonds and insurance are often required, and business owners purchase them because they are required to, and often do not fully understand why.

What's the Difference?

Along Comes Errors and Omissions Insurance

Who cares about errors and omissions insurance? Actually, that is the type of attitude that would require someone to have EOI. It was a coworker of mine that turned me onto it, and I am glad that he did. He and I were doing countless background checks on potential employees: 4,000+ of them.

He explained to me that having EOI would protect individual investigators in the event they failed to do something correctly on a background check (e.g., making an “error” or “omitting” something in the course of their work).

And that is exactly what EOI is. It is insurance coverage that pays out in the event of professional negligence. It is used by countless professionals from freelance writers to doctors and lawyers. I did not get back to having EOI until a few years ago when I became involved in online marketing.

After obtaining my own legal advice, I decided it was best to have it. So here I am, years removed from doing government work, but sitting on a policy that protects me professionally.

Surety Bonds Vs. Errors and Omissions Insurance

It kind of sounds like bonds and insurance are the same. However, that is not the case. So now that I bored you with my personal stories, let’s get down to the nitty gritty. What is the difference between a surety bond and EOI?

Let’s start with surety bonds

There are typically three parties in each transaction. The first party is you (the principal), the second party is the person you contract with (the obligee), and the third party is who pays out (the surety) in the event there is a claim.

There are many types of surety bonds depending on the profession, but basically the “surety” is going to pay the “obligee” in the event you breach your agreement. Here are some examples:

A surety pays for damages caused by an electrician who failed to follow code and caused damage to a house.
A mining company fails to implement reclamation procedures after mining a claim; the surety will end up paying the cost to clean up the area.
A surety posts bond for someone in jail; if that person fails to show up for their court date, the surety will lose the bond money to the court.
There are numerous types of surety bonds, and I could list many more examples, but I am sure you now get the idea of how they work.

Now let’s take a look at E&O Insurance

EOI is a professional liability insurance. What EOI does is protect you from liability for negligence. It works in a similar manner as a surety bond, except EOI protects the policy holder while the surety bond protects the person receiving the service.

Here’s a simple way to remember it–keep in mind this is just an example and each situation should be evaluated individually:

Let’s say you are a notary and fail to properly notarize a document. As a result, the person who hired you loses a piece of real estate they wanted to purchase. A surety bond would pay the signee for any damages resulting from your mishap. Now, in the event that person sues you for negligence, EOI will help cover any damages awarded in court.

Here are some examples of EOI claims:

An architect gets sued for failing to make a correct calculation, causing a company to stop construction once they notice the error.
Accountant makes a mistake while calculating someone’s business income. The person is later audited by the IRS and sues the accountant for the error.
An attorney gives legal advice to a client which turns out to be false and the client sues for damages caused from acting upon that advice.
If you’re still confused, here is the easiest way to remember the difference. Bonds are meant to protect the obligee, while EOI is meant to protect the principal. If something bad happens, a bond pays the victim while insurance will pay you if the victim sues you.

Cost of Surety Bonds and EOI

Calculating the cost of bonds versus EOI is very different. For errors and omissions insurance, the cost has pretty much become standard over the years. You can base the cost on the amount of coverage you are looking for within the industry you work.

Unlike insurance, bonds are determined individually based on risk and there can be a wide range of prices depending on your profession. The cost of a bond is determined by your personal conduct. Expect a credit check when you apply for a bond as how you handle your financial obligations is a big factor in calculating the rate.

For bonds, someone is taking a risk that you are going to do what you are supposed to do. If you have a history of not following the rules (such as the people in the examples I used previously), then expect to pay a higher rate.

Basically, you need to know that EOI cost is roughly the same no matter who you are, while bonds can vary depending on your personal conduct.

Summing it Up

Surety bonds and EOI may seem similar, but there are some major differences that set them apart. The basic concepts to remember are that EOI pays if you have to pay for your negligence, while a bond pays someone you harm as a result of your conduct. Calculating the cost of each is also different.

Do you need them? No comment from me. But at least you can now understand each one better which will help you make that decision.

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