A bond is not an insurance policy, having some fundamental differences from it. An insurance policy is an agreement between two parties only, the Insured and the Insurer whereby, in return for a premium, the Insurer agrees to pay claims should the event insured against occur. A bond, however, involves three parties:
The contractor, who is primarily responsible for fulfilling the obligations set forth in the bond. He has to perform some act under certain circumstances, or else pay damages.
The employer, who is the beneficiary under the terms of a bond; either the obligation set out is fulfilled or the amount of the bond is available so that the employer should be adequately protected.
The surety (the Insurer) is the party who joins with the contractor for the purpose of guaranteeing to the employer the fulfilment of the contractor’s obligations.
Comparing this with insurance, the intent of employers in requiring a bond is protection against loss and in that sense, they view it as insurance. The concern is not with who ultimately makes good, as long as they suffer no loss. In bonding, however, the contractor obtains no protection himself under the bond. The employer, who is the third party to the contract, is the only one directly covered under a bond.
The fundamental difference between an insurance policy and a bond is that, with insurance, the Insurer takes the risk and the Insured pays a premium for transferring certain risks to the Insurer. With a bond the surety should dispel all foreseeable risks before signing the bond, so that no responsibility passes from the contractor to the surety. The contractor still retains all his responsibilities in respect of his contract with the employer and, in the event of a claim by the employer for non-performance, it is the contractor who has the primary responsibility of satisfying that non-performance. Only if they are unable to do so will the surety’s own assets be at risk.
It can be seen that commercial general insurance is a complicated matter, and is best handled by a professionally-qualified insurance broker or agent, who will also be there for you in the event of a claim. For further information, please contact one of the insurance companies listed in our Bahamas Directory.
Nothing contained in this article should be construed as altering, amending or adding to any policy of insurance, cover note or binder. For full details of the policy cover, exclusions, restrictions etc., reference should be made to the policy document itself, a specimen of which will be supplied on request. Neither the author of this article nor his employers nor principals accept any responsibility for the accuracy or otherwise of anything contained therein.