*The information contained in this article is specifically related to Canadian Surety Bonds & Insurance.
“What is Bonding Insurance?” A Common Misnomer.
One of the most frequent misunderstandings in the financial world is the use of the term “bonding insurance.” While this phrase is widely used, it’s actually an incorrect terminology.
At Bond Connect, we often receive inquiries from clients about “bonding insurance.” This term, while commonly used, can lead to confusion. What most are referring to when asking about bonding insurance, is actually a surety bond — a type of financial agreement that guarantees the performance or obligations of one party to another.
Bonding and insurance serve different purposes and operate under fundamentally different frameworks.
"Bonding Insurance" is an incorrect terminology
To clarify this misconception, it’s important to understand the nature of both bonding and insurance, and why they should not be used interchangeably.
At the heart of the misunderstanding is how risk is handled in bonding versus insurance.
The Core Difference; Risk Assumption vs. Risk Transfer.
Insurance is a two-party agreement where the insurer (the insurance company) assumes the risk from the insured.
In exchange for premiums, the insurance company provides financial protection, covering losses that may occur due to specific events like accidents, theft, or damage.
The key feature of insurance is risk transfer — the insured is protected financially, and the insurance company shoulders the responsibility for the loss.
For example, if a contractor purchases general liability insurance and an accident happens on-site, the insurance company pays for the damages, and the contractor does not need to reimburse the insurer.
Surety bonds, on the other hand, involve a three-party agreement between the principal (the party requiring the bond), the obligee (the party protected by the bond), and the surety (the bonding company).
Instead of transferring risk, a surety bond guarantees that the principal will fulfill their obligations.
If the principal defaults (meaning: fails on its obligations), the surety initially pays the obligee, but unlike insurance – the principal is required to repay the surety. In this sense, the risk remains with the principal, not the surety company.
For this reason, we often encourage clients to think of their bonding similar to a line of credit, rather than a form of coverage or protection.
An example could be if a contractor fails to complete a construction project, the performance bond ensures that the project owner (obligee) is compensated. However, the contractor (principal) is still obligated to repay the surety for any claims paid out.
Surety Bonds are not insurance
The term “bonding insurance” is misleading because it suggests that bonding works like traditional insurance, where a company absorbs the risk and the insured is protected from any financial burden.
In reality, bonding is more akin to a line of credit or a financial guarantee, where the bonded party (the principal) remains ultimately responsible for their performance and any losses.
Here’s a breakdown of key distinctions that make the terminology “bonding insurance” incorrect:
Nature of Protection
Insurance is designed to protect the insured from unexpected losses. Bonding is designed to protect a third party (the obligee) from a default or failure by the principal.
Risk and Responsibility
In insurance, once a claim is made and covered, the insured generally bears no further responsibility. In bonding, however, if a claim is paid, the principal must reimburse the surety.
Parties Involved
Insurance typically involves only two parties—the insurer and the insured. Surety bonds always involve three parties—the principal, the obligee, and the surety.
Actual Purpose
Insurance mitigates loss by spreading risk across many policyholders, whereas bonding ensures that obligations will be met, with the principal remaining accountable for any failure.
For Example:
A construction company with general liability insurance and a performance bond will have two very different financial protections.
Their liability insurance would cover damages caused by accidents on-site. However, if they fail to complete the project, the performance bond would ensure that the project owner is compensated, but the construction company would need to repay the surety for that compensation.
What are the main differences?
At their core, one of the primary distinctions between surety bonds and insurance lies in their structure and parties involved. Surety bonds require a three-party agreement, whereas Insurance only consists of a two-party agreement.
Surety Bonds
A surety bond involves three parties: the principal (contractor), the obligee (project owner or beneficiary), and the surety. The surety provides a guarantee that the principal will fulfill their contractual obligations to the obligee.
Surety Bonds and Indemnity Agreements: Surety bonds require an indemnity agreement where the principal agrees to indemnify the surety for any losses incurred due to the principal’s failure to meet contractual obligations.
This agreement forms the backbone of surety bonds and establishes a high level of accountability.
Insurance Policies
Insurance contracts typically have two parties: the policyholder (insured) and the insurer. The insurer provides coverage to the policyholder against specified risks or losses.
Insurance and Loss Anticipation: Insurance products are designed to anticipate potential losses and uncertainties.
Premiums are determined based on the likelihood of these losses occurring, and policyholders often have deductibles which need to be paid before the insurance coverage kicks in.
As you can see from the distinction above, insurance policies are written to almost expect a loss to occur which is a form of sharing the risk.
Bonds require a financial backing and obligation to pay the guarantor back in the event of a loss. In this sense bonds are closer to a form of credit rather than a coverage.
Why the confusion on bonding insurance?
There are some differences between bonding and traditional insurance that may lead to some confusion. Surety bonds function as a three-party agreement between the principal, obligee, and surety, whereas insurance usually covers two parties (insurer and insured).
Surety bonds guarantee a third party’s obligation, while insurance pools risk across many people. Insurance pays out claims to the insured; surety bonds require repayment from the bonded party in case of a default.
Surety bonds are not optional in certain industries—they are required by law or contract, and surety bonds protect the client (obligee), not the bond holder (principal).
Many contractors believe that a performance bond works like traditional insurance, where a claim is filed, and the surety simply pays.
However, in surety bonds, the principal is ultimately responsible for reimbursing the surety for any claims paid out on their behalf.
Bond Connect’s specialized focus on surety bonds sets the brokerage apart from companies that offer a broader range of financial products. We offer practical advice on choosing the right bonding underwriters as well as offering a strong reputation, experience, and customer service.
A point where people may become confused for bonding vs. insurance is that insurance brokers often claim to offer surety bond services, but lack the expertise to do so.
Many businesses need both bonding and insurance
While bonding and insurance are fundamentally different, many businesses—especially in industries such as construction, logistics, importing, and professional services — find that they need both to operate effectively and manage risk.
Each provides a distinct type of financial protection, ensuring that businesses can fulfill contractual obligations while also guarding against unforeseen losses.
Here’s are some examples of when and why both bonding and insurance might be required:
In the construction industry; to ensure project completion and to manage liability.
The construction industry is one of the most common sectors where businesses need both surety bonds and various types of insurance.
Large projects, particularly government contracts, often require contractors to be bonded to ensure performance, while insurance is needed to protect against potential losses or damages.
A construction company bidding on a public project might need to secure a bid bond to guarantee their proposal, a performance bond to ensure they will complete the project, and a labour & material payment bond to protect subcontractors and suppliers.
If the contractor fails to meet the terms of the contract, the surety will ensure the project is completed or the obligee is compensated.
The contractor remains responsible for reimbursing the surety for any claims paid out.
In addition to bonding, that same contractor will need general liability insurance to protect against accidents or damage caused during the project.
If an employee is injured on-site or a third-party’s property is damaged during construction, the contractor’s liability insurance may cover those expenses, shielding the company from bearing the full financial impact of these claims.
In this case, bonding ensures that contractual obligations are met, while insurance protects the contractor from the unexpected risks of accidents, property damage, or employee injuries.
For professional services; to protect against errors and to guarantee payment.
Certain professional services—such as lawyers, financial advisors, importers / exporters, and even healthcare providers — may require both bonding and insurance to safeguard clients and manage risks associated with their work.
Professionals like notaries or mortgage brokers may need to be bonded to guarantee ethical and legal performance of their services.
If one of these professionals makes an error that results in financial loss for a client, the client may be able to file a claim against the bond. However, the principal will need to repay the bond company for any compensation paid to the client.
These same professionals often need professional liability insurance to cover potential negligence or mistakes that result in a client’s financial loss.
Professional liability insurance would help cover the financial claim, protecting the advisor’s personal or business assets from being depleted by a lawsuit.
In these situations, bonding ensures that professionals meet their legal and ethical obligations under a licensing body, while insurance protects them from the potential fallout of mistakes or negligence in their work.
For government contracts; to protect public funds and manage risk.
Businesses working on government contracts, whether in construction, consulting, waste disposal, or other sectors, are often required to secure both bonds and insurance to protect public funds and cover liabilities.
Most government contracts require performance bonds to ensure that the contractor fulfills the contract.
This bond guarantees the taxpayer that the project will be completed on time and within specifications.
A contractor awarded a government project to build a highway is required to provide a performance bond. If they default, the surety steps in to ensure the project is completed, protecting public funds.
Alongside the bond, the contractor may require insurance such as general liability, automobile, or workers’ compensation to cover any accidents or property damage that may occur while working on the public project.
Here, bonding ensures that public contracts are carried out and taxpayer money is safeguarded, while insurance manages risks such as accidents, injuries, or property damage.
In many industries, bonding and insurance are not just beneficial but necessary to provide comprehensive protection for businesses, individuals, and clients.
Why you need a bonding focussed broker
Navigating the complexities of surety bonds requires a unique skill set and expertise.
Surety bond specialized brokers possess the knowledge to evaluate a business and ensure adequate bond limits, rates, and servicing when choosing a bonding underwriter to affiliate with.
This evaluation process ensures that qualified contractors have the bonding support they need to undertake projects that require them.
Additionally, surety bond experts understand the intricacies of different types of surety bonds and tailor solutions to specific industries and project requirements.
Their deep understanding of the surety bond process ensures that projects are completed smoothly and contractual obligations are met with no delays.
At Bond Connect, we guide our clients through every step, from understanding which bond is necessary to presenting a strong application to underwriters.
Our expertise ensures that clients receive the bonds they need quickly and efficiently.
Concluding what is "Bonding Insurance"
For business owners, contractors, or individuals seeking bonding services, it’s essential to understand that bonding and insurance are not the same.
Bond Connect specializes in providing surety bonds, and while the term “bonding insurance” might persist in everyday conversation, it’s important to recognize that bonding is not about shifting risk away from the bond holder—it’s about guaranteeing an obligation, with the bond holder remaining responsible.
Understanding the correct terminology is crucial because it helps businesses make informed decisions about the types of financial protection they need, and it clarifies expectations in the event of a default or claim.
Whether you’re a contractor needing a performance bond for a construction project or a business requiring a license bond to pull permits in their industry.
Contact us today to find out how we can provide the bonding solutions that fit your unique needs.
