Most drivers understand that there is a requirement for auto insurance if they are to legally operate a vehicle on US roads. Each state enforces its own minimum policy limits that must be met, and most require a driver to provide some proof of insurance periodically to ensure they are in-line with these regulations. Auto insurance is mandated as a strategy to protect not only the driver of a vehicle but also the financing company that manages the loan against the car and the other drivers and pedestrians on the road in the event of a car accident. This transfer of risk means the insurance company is responsible for paying for damages to property or another person, up the policy limitations. The driver of the vehicle pays a deductible out-of-pocket, but the remaining cost is typically covered by the insurance provider.
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Auto insurance is a standard component of vehicle ownership for most drivers, but there are instances when an insurance company is not willing to offer coverage to a specific driver. Fortunately, there are alternatives to conventional auto insurance of which many drivers are unaware. Some states allow drivers to put a deposit on hold with the state to help cover financial losses in the event of an accident. Others give drivers the ability to take out a surety bond instead of insurance, also intended to protect other road users should an accident take place. However, a surety bond in place of traditional auto insurance is not the right fit for every driver. It is necessary to understand what a surety bond is, how it works in terms of personal and business coverage, and who it most benefits as an alternative to auto insurance.
How a Surety Bond Works
The simplest definition of a surety bond is a legally binding contract that ensures certain obligations are met between several different parties. These parties include the principal, or the person who needs a bond, the oblige, or the person or organization requiring the bond, and the surety, or the company offering the bond on behalf of the principal.
With all surety bonds, the person who needs a bond must submit an application for review to a surety company so he or she can be evaluated based on a handful of factors. These factors may include financial track record, typically involving credit history or income, and any other claims that have been made against the person as part of a previous surety bond or insurance contract. Individuals with less than stellar credit history or low income can still get approved for a surety bond, but it may cost more to do so than if they had strong credit.
A surety bond can be thought of like an insurance policy, but it works differently in practice. When a bond is in place, the surety promises to pay up to the total bond amount in the event of a claim. For drivers, this would mean an accident that was their fault. While the surety takes care of the cost for damage up to the bond limit, the owner of the bond is often required to repay that amount over time to the surety company. In essence, a surety bond works like a form a credit to the person applying for the bond.
Individual Surety Bonds
Surety bonds are available on an individual and a business basis. Individuals may get a surety bond instead of traditional auto insurance, for instance, when they are unable to secure affordable insurance through an insurance company. Not all states allow surety bonds as an alternative to car insurance, but those that do require the surety bond is at least the same amount as the minimum auto insurance coverage mandated by law.
Business Surety Bonds
Business surety bonds are also available to companies who want an alternative to conventional auto insurance. These are far more prevalent than individual surety bonds, particularly for auto dealers. With an auto dealer surety bond, businesses that own several vehicles may find coverage more affordable than auto insurance on each car, van, or truck they own. The cost savings of an auto dealer surety bond can be significant when compared to traditional insurance on the commercial side of the line.
How it Differs from Auto Insurance
For many drivers, auto insurance is the natural choice for meeting state requirements for coverage. However, surety bonds work differently from car insurance, making them more suitable in some circumstances. The most notable difference between auto insurance and a surety bond is the way damages are covered under each. A surety bond agency pays for damages up to the bond limit, but the bondholder is then required to repay that amount of the surety as a form of debt. With conventional auto insurance, a policyholder only pays for their out-of-pocket deductible when damages take place, with the insurance company covering the remaining expenses, up to policy limits.
Additionally, surety bonds can cost significantly less than auto insurance, particularly for drivers who have strong credit but a less than perfect driving record. Auto insurance companies and surety agencies look at different factors when approving a new application for coverage, and as such, bad drivers may win with surety bonds. Drivers who opt for a surety bond as an alternative to auto insurance pay only a small percentage of the total bond amount, while drivers who choose auto insurance pay a monthly or semi-annual payment indefinitely. For businesses with surety bonds, the difference in cost can be substantial compared to traditional auto insurance.
Who Should Consider a Surety Bond
Businesses like auto dealers that own several vehicles at one time may consider the benefits of securing a surety bond instead of traditional insurance, often as a way to save on the required expense. Some individuals with a poor driving record may also recognize the benefits of having a surety bond instead of auto insurance, especially when they cannot get approved for a new insurance policy easily. Surety bonds do require that the bondholder repay any claims against the bond over time, so it is necessary to consider this major difference when comparing bonds to auto insurance. Overall, a surety bond for an individual or a business may be a smart choice in states that offer this as an option.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.