What is the primary difference between insurance and surety?

The primary difference between insurance and surety lies in the purpose and function of the products. Surety bonds are fundamentally designed to guarantee the performance of a future act, meaning that they provide a promise to the obligee that a specific obligation will be fulfilled by the principal. For instance, in construction, a surety bond ensures that a contractor will complete a project according to the contractual terms.

On the other hand, insurance typically compensates for past losses or damages that have already occurred. It is intended to protect policyholders against unforeseen incidents that could result in financial loss. Due to this foundational difference, surety is future-focused, affirming a commitment to perform an obligation, while insurance primarily deals with covering losses that have already happened.

The other statements do not accurately capture the essential distinction. Insurance involves premiums, while surety does require a premium as part of its contractual agreement. Flexibility or rigidity can be subjective and varies based on the specific terms of the policies or bonds rather than being inherent to the types of coverage. Thus, the clear differentiation lies in the assurance of future actions through surety, setting it apart from traditional insurance principles.