What is the difference between a bond and insurance?

A bond is fundamentally an agreement that involves three parties: the principal (the party required to obtain the bond), the obligee (the party that requires the bond for protection), and the surety (the party that issues the bond and guarantees the obligations of the principal). This relationship is distinct from insurance, which typically involves a contract between an insured party and an insurer to provide coverage for specific risks.

This tripartite structure of bonding is crucial as it ensures that the obligee is protected if the principal fails to fulfill an obligation. The surety acts as a financial backer and guarantees that the principal will perform their duty, such as completing a contract or paying taxes. This differentiation is essential in understanding how these financial instruments serve different purposes and risk management strategies.