What is a Surety Bond?
Sometimes, a business may be required to have a surety bond to guarantee that work they are contracted to do will be accomplished. Each surety bond must be uniquely tailored to meet specific needs.
How Surety Bonds Work
There are three parties involved in a surety bond: the principal, the obligee, and the surety.
- The principal purchases the surety bond to guarantee quality and completion of contracted work
- The obligee is the entity who requires the principal to purchase the bond
- The surety is the entity that issues the bond and financially guarantees the principal’s ability to complete the contracted work
If the principal does not complete the work as contracted, the obligee can make a claim for payment from the bond up to but not exceeding the bond amount. The principal is then obligated to pay back the claimed amount to the surety.
Types of Surety Bonds:
Surety bonds can be required for different types of contracts. The two most common types of surety bonds are contract surety bonds and commercial surety bonds.
Contract Surety Bonds
Contract surety bonds are bonds the government or an owner of a construction project may require a contractor to obtain. There are three types of contract surety bonds:
- Bid bond – this bond protects a project owner (obligee) in the event a successful bidder will not enter a contract and will not provide the required surety bonds or other security
- Performance bond – this bond protects the obligee if the contractor defaults on its obligations under the bonded contract
- Payment bond – this bond guarantees that the contractor will pay subcontractor labor and material bills associated with the construction project
Commercial Surety Bonds
Commercial Surety Bonds are required of individuals or businesses by the government, legislation or by other entities. Travelers Bond & Specialty Insurance provides the following types of commercial surety bonds:
- License and permit bonds - required by state, municipal or federal ordinance or regulation. These bonds may be required as a condition for engaging in a particular business or exercising a particular privilege. Examples include performance and payment bonds, customs bonds, tax bonds and warehouse bonds.
- Court bonds, including:
- Judicial bonds, required of either a plaintiff or defendant in judicial proceedings, to reserve the rights of the opposing litigant or other interested parties
- Fiduciary bonds - required of those who administer a trust under court supervision
- Public official bonds - required by statute for certain holders of public office, to protect the public from malfeasance by an official or from an official's failure to faithfully perform duties
- Notary Bonds – surety bond required by statute for a notary public and guarantees a notary will protect the public from financial harm as a result of the notary failing to perform required notarial procedures
- Miscellaneous bonds - bonds that do not fit into any of the other categories
How to Apply for a Surety Bond
Your city, county and state have different requirements for how to get a surety bond. It is important for you to understand what type of bond a particular obligee requires and in what amount, in order to get a surety bond. You should then contact your independent insurance agent to understand how to apply for a surety bond. They will guide you through that process, which will include:
- Evaluation and qualification – you will be required to provide financial documents to demonstrate your creditworthiness and that you have the resources to fulfill the terms of the surety bond. You will also be required to provide details about the project that will be covered by the bond.
- Underwriting – Travelers will assess the risk to bond you and may offer a formal agreement requiring your indemnification in the event of a loss along with other required responsibilities
- Bond issuance – the surety bond will be issued for you to sign and deliver to the other party (Obligee)
How Much do Surety Bonds Cost?
The cost (known as the premium) of a surety bond depends on a number of things, including the bond type, length of time for coverage, risk, the principal’s credit score and past claims history, financial wherewithal, and other factors. Depending on that information, the surety bond premium can vary.
Each state and their governing agencies set their own surety bond requirements. The obligee will inform you if they require a bond, the bond type and the amount of coverage.
Find an independent agent near you to learn more about surety bonds and to get a quote for a surety bond program that is right for your business or project.