Law of Commerce
what is bonding? distinguished between bonding and insurance coverage
According to Cheeseman (2012), bonding and insurance are forms of protection that
guards against financial loss, but work in different forms. Bonding is a specific protection by
providing coverage when the specified job is not complete to the client’s satisfaction, such that a
claim can be made for compensation purposes. The bond differs from commercial liability
LAW OF COMMERCE 2
insurance since the bond only covers the specific obligation and not broader coverage like
insurance claims. In other words, the insurance protects the business owners, while the bond
protects the client and this makes the tow work concurrently without any conflict of law.
Whereas an insurance coverage is a form of risk management in a two party contract
between the insured and the insurance company, a bond is a contract between three parties,
namely the surety, the principal, and the obligee. In this regard, the surety is issued by one party
on behalf of the second party to guarantee that the second party will complete the obligation to a
third party. Whereas the bond provides legal protection to the obligee, the insurance coverage
protects the insured against a risk (Cheeseman, 2012). Another difference is that the premium
paid for the bond is for the guarantee that the principal fulfills his obligations, while the
premiums paid is for insurance coverage is designed to cover for potential losses. For insurance
coverage, losses are expected and the insurance rates are adjusted to cover losses depending on
many factors, however, losses are least expected for bonds since contracts are awarded to
qualified persons. Bonding is a form of credit such that the principals are to pay for the claims,
however, the insurance coverage claim is paid and the insurance company doesn’t expect to be
repaid by the insured.
Reference
Cheeseman, H.R. (2012). Business Law 8 th Edition. Prentice Hall
