Differences Between an E&O Policy & a Bond

by Cindy Quarters

When opening a new business, taking over an existing one, or just trying to deal with the paperwork involved in running or working with a business, many unfamiliar terms crop up. Sometimes -- as in the case of certain insurances -- it may seem that the terms are actually two names for the same thing. An example of this is an E&O policy and a surety bond. While on the surface they may seem similar, they are actually quite separate and distinct.

E&O Basics

An errors and omissions policy, usually referred to as an E&O policy, is a type of liability insurance designed to protect both individuals and businesses in the event of a lawsuit resulting from oversight or negligence. Common types of businesses that carry E&O insurance include those offering investment and financial advice, notary publics, lawyers and contractors, but such insurance can protect any type of business.

Surety Bond Basics

A surety bond is a type of insurance coverage that guarantees payment to a customer or an agency with whom the bondholder has a contract or an obligation. There are several broad categories of surety bonds. Court bonds guard the assets of an estate, ensure that funds will be available after a lawsuit, and guarantee proper management of assets. Contract bonds are mainly for public projects and guarantee completion of the project and payment to the subcontractors. Commercial bonds are the most common and may guarantee anything from the payment of cigarette taxes to the performance of a company.

Differences

A surety bond protects the customer against damages resulting from the work of a business with which the customer has a contract. Any payout goes directly to the customer or his agents. This type of bond is also used to guarantee payments, includes wages and taxes. An E&O policy protects the business and its assets from legal action stemming from omissions, negligence or oversights. Any payout goes to the business, the owner or her agents. Surety bonds are not always optional. E&O policies typically are optional.

Considerations

Professional licensing associations may require that applicants have surety bonds in place prior to their acceptance as members. Most states also typically require bonds for certain types of businesses and those that fail to get a surety bond may not open their doors. Errors and omissions insurance is not generally required of a business, but many businesses purchase this type of coverage in order to protect themselves in the event of a lawsuit. Both types of coverage have various restrictions on the types of situations that are covered and when the insurance will or won’t pay.

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