Surety Bonds Vs. Professional Liability (Errors & Omissions) Insurance

Surety bonds are a useful service, but not the same thing as professional liability insurance, also known as errors and omissions (E&O) insurance. You may need both surety bonds and professional liability insurance to safeguard your business.

What Are Surety Bonds?

A surety bond is a contract between three or more parties, issued by a surety company on behalf of a party known as the principal. The contract guarantees that the principal will complete an obligation to a third party, known as the obligee. If the principal fails to meet its obligation, the obligee may recover its losses from the bond. A surety bond is a form of credit, and the principal is responsible for paying claims under the indemnity agreement signed when the bond was purchased.

What Happens If A Claim Is Made On My Surety Bond?

If a claim is filed against your surety bond, the surety company will expect you to take care of it. If you fail to do so, the surety company will typically conduct an investigation to determine whether the claim is valid. If the claim is found to be invalid, no further action is taken. However, you may be liable for investigation costs incurred by the surety company.

If the claim is found to be valid, the surety company will remind you of your obligation and expect either:

• A response to the claim
• Resolution of the claim (typically involving financial compensation for damages)
• A valid defense to the claim

If you fail to provide any of the above, the surety company will decide based on the information and documentation provided by the claimant. If the company pays the claim, it will expect reimbursement from you for the settlement and associated legal costs.

What Is Professional Errors & Omissions Insurance?

Errors and omissions (E&O) insurance is a type of professional liability insurance designed to protect professionals, companies, and their workers against claims of negligent actions or inadequate work. In most cases, it covers claims settlements up to policy limits, in addition to court costs and legal fees. E&O insurance is generally a must for professional businesses that give advice or provide a service.

Differences Between Surety Bonds And E&O Insurance

Although a professional business may need both surety bonds and professional liability insurance, there are significant differences between the two. Our experienced agency can help you secure both forms of protection.

• Contract: A professional liability insurance policy is a contract between the insurance company and the insured, wherein the insurer promises to compensate the insured for covered losses. A surety bond is a contract among three or more parties to guarantee that the principal purchasing the bond will complete its obligations to a third party.
• Protection: While E&O insurance is designed to protect the insured from loss, surety bonds are designed to protect third parties.
• Premiums: Professional liability insurance premiums are paid to cover potential losses the insured may incur. Surety bond premiums are paid to guarantee the principal fulfills its obligations.
• Claims: A claim on an E&O policy is paid by the insurance company to make the insured whole after a loss. With a surety bond, the principal is responsible for paying any valid claims.