What is a Surety Bond?

What is a Surety Bond?

A surety bond is a product that protects the consumer or government against harm caused by you or your company.  There are thousands of bond types and each one protects something different.  Some protect against fraud and others guarantee performance.  Listed below are a few common surety bond types:

  • License Bonds – used by businesses who require state licensing.
  • Contractor Bonds – used by contractors for licensing.
  • Performance Bonds – used by contractors who perform public projects.  Sometimes called contract bonds.
  • Court Bonds – used by courts for certain court proceedings.

Each bond type also comes with a specific form.  The form normally lists the three parties to the bond which are:

  • The principal – typically you or your company.
  • The obligee – the person or entity who benefits from the surety bond.
  • The surety – the insurance company who issued the bond.

Bond forms and contracts establish a connection between the three parties.  The surety backs the principal.  The principal agrees to follow the obligee’s rules.  If not, the surety pays the obligee for their loss.  This surety bond definition is broad but also a good place to start when learning about them.

Why do I need a Bond?

You may need a bond for a lot of reasons but we usually find it’s because you’re applying for a state license.  State’s often require them to protect its consumers from harm caused by violating certain industry rules.  For example: You buy a vacation package from a travel agency.  The travel agency then takes your money but doesn’t book your travel.  In certain cases, you may be eligible to make a claim on the travel agency’s bond.  Some states like Florida and California have travel agent bonds which can reimburse you if the travel agency cannot.

If you’re a contractor, the chances are that you’ve already heard of bonds.  Construction companies of all shapes and sizes will most likely need one at some point.  Many states require contractor license bonds to ensure fines and fees are paid.  Local governments require bid and performance bonds to perform public construction work.  Towns and counties may also require code compliance bonds for registered contractors.

Lastly, you may need a court bond if you’re involved in a court case.  Probate cases, lien releases, and injunctions often require them to protect an individual or entity from harm.  Probate bonds protect a person’s estate while lien release bonds protect the person who filed the lien.

What does a Surety Bond Cost?

License and permit bond cost depends primarily on your personal credit score. The higher your score; the lower the cost. In general, individuals and businesses with excellent credit can expect to pay 1-3% of the bond amount needed. For example: A $10,000 surety bond would cost $100-$300 annually. Individuals and businesses with bad credit can expect to pay a higher cost ranging from 5-10% of the bond amount. For example: The cost would increase from our previous example to $500-$1,500. Other factors which determine how much a surety bond costs are the type of risk, bond form language, amount of time in business, and the duration of the risk.

Payment and performance bond cost works a little differently than those mentioned in the previous paragraph.  They require surety companies to review your credit and work history a little closer.  Additionally, the job size assists in determining your total bond rate or cost.  Larger projects generally cost more in terms of total premium but are cheaper in terms of overall rate.

How do I apply for a Surety Bond?

  1. Complete our online Surety Bond application, or
  2. Download and complete our printable Surety Bond application, and
  3. Receive your surety bond quote in minutes!

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Is a Surety Bond insurance?

No, 99% of bonds are not insurance.  Surety insurance and surety bond insurance are generic terms given to bonds and are different in many ways.  The most apparent difference is the claims process.

Let’s say you’ve been involved in a minor fender bender.  Nobody was hurt and you weren’t at fault.  What happens?  The insurance company pays for your loss up to your policy limits less your deductible.  Your car gets fixed and that’s the last you hear of it.

Now let’s say someone has claimed against your bond.  What happens here?  The claim is usually investigated by the surety company once they are notified.  They obtain information from the claimant and the principal (you).  They determine you are at fault and ask you to satisfy the complaint.  However, let’s now say you can’t (or won’t) pay the bond claim.  The surety must then pay the claim on your behalf and will come back to the principal (you, your assets, etc.) to be reimbursed.

What is a Bond Claim?

A claim is an action taken to force your surety company to pay for harm cause by your company.  Claims can be both small and large.  However, claims can generally not be for more than the bond amount although it has happened in the past.  Bond claims are often paid by the surety company on you or your company’s behalf.  You and any other indemnitors must pay back the surety company for costs it incurs on your behalf.  This is known as indemnification.

Bond claims need to be avoided at all costs.  Claims often result in the revocation of your state or other license type.  Additionally, current and past claims make it very difficult to become bonded again.  If you’re a contractor, a claim could affect your ability to obtain state or federal contracts.

How do I get bonded?

Getting bonded is a fairly simple process.  Follow the steps below:

  1. Determine which type and amount of bond you need;
  2. Complete the online application;
  3. Receive your quote;
  4. Pay for it online or over the phone;
  5. Receive an electronic copy in minutes.

The original copy of your bond will be sent to your address.  You will most likely need to sign it.  Additionally you must also send the original to the state, company, or whoever is requiring the original bond from you.

View our surety bonds by state!