Surety bonds are crucial for a variety of professional services. If you work in construction, building, and other similar areas, you will likely need a surety bond at some point. Surety bonds offer the project owner protection and ensure the work is finished correctly.
Your Guide to Surety Bonds
A surety bond is a promise by one party to be liable for the debt, default, or failure of another borrower. If the borrower defaults, that party assumes responsibility for the borrower’s debt obligation.
It’s formed via a three-party contract: the surety (also called a guarantor) guarantees the obligations of the borrower (the principal) to a third party, called the obligee.
The surety bond protects the obligee against loss if the principal fails to fulfill the contract or obligation.
One of the most common uses of surety bonds is to protect the public, by guaranteeing important obligations will be fulfilled.
For example, a construction surety bond will ensure that a building construction project that benefits the public will be completed. If the principal (the construction company) abandons the job before the project is finished, the obligee (the city government) files a claim with the surety company (the guarantor) -- who then hires a new contractor to finish the project.
The guarantor pays the claim initially, then comes back to the principal for reimbursement of the original cost, plus any additional costs incurred to finish the project.
The Main Types of Surety Bonds
Commercial Bonds
The provision of professional services regularly involves detailed agreements between contractors and their clients -- clients who require a guarantee that contractors will uphold their portion. Surety bonds allow contractors to provide that guarantee.
Construction Bonds
There are bonds available specifically for construction services. How large a bond these businesses need depends on the scope of their project. Some of the types of companies and contractors that commonly seek surety bonds include:
- Construction
- General contractors
- Home builders
- Trades (electricians, plumbers, etc.)
- HVAC contractors
- Painting companies
- Drywallers
- Flooring companies
- Roofing companies
- Landscapers
- Fence & guardrail construction
- Environmental remediators (asbestos removal, tank work, landfill work)
- Roadway constructors & paving
- Utility construction
- Bridge & steel erection
- Start-up contractors
Court Surety Bonds
A court of law might require a defendant to secure a court bond. The most common circumstance is a bail bond, which ensures that an individual will attend a scheduled court appearance. Other common instances include cost bonds, indemnity to sheriff bonds, and replevin bonds.
Fidelity Surety Bonds
While you can’t control other people's actions, bonds can ensure they don't hurt your business.
Fidelity bonds cover crimes and dishonest acts committed by employees. Employees with regular access to financial information, safes, cash registers, or valuables have the ability to commit fraud -- especially if their employers don't consider the possibility of intentional fraud.
Fidelity bonds can also protect your business from losses caused by employees of a third-party contractor.
Main Types of Fidelity Bonds
- Crime & employee dishonesty bonds: Protects a business from financial loss caused by its employees, including employee theft from both the employer’s and its customers’ job sites. Workplaces that allow employees to work near cash registers, safes, and unsecured financial information should consider a fidelity bond, even if they monitor their workforce with cameras or digital IDs.
- Business service bonds: Businesses that regularly send employees to their clients' or customers' locations should purchase these bonds to cover any intentional theft or property damage. These employees frequently have extended and unmonitored access to valuables at these locations.
- Employee Retirement Income Security Act (ERISA) bonds: Federal regulation requires any business that offers an employee retirement plan to purchase ERISA fidelity bonds to cover the employees who manage these benefit funds. ERISA bonds must cover at least 10% of the funds handled by employees, but businesses should be sure to check their state’s specific regulatory requirements when purchasing coverage.
- Financial institution bonds: Designed to protect banks and credit unions, they’re also referred to as "bankers blanket bond" insurance. This type of bond protects the institution’s balance sheet against fraud. Any institution that provides financial services to third parties needs this type of bond, including depository institutions, investment managers, and investment funds.
Many states require a business to purchase fidelity bond coverage before issuing it a business license. Coverage may be provided using either a standard ISO form or a Surety Association Form.
Insurance vs. Surety Bonds
While surety bonds are similar to insurance, the two terms aren’t interchangeable because of their intrinsic differences.
The primary difference between insurance and surety bonds is that the latter is a three-party arrangement, while insurance involves only two parties. With an insurance policy, the interests of the policyholder (principal) are protected. But surety bonds protect the interests of a third party (obligee), rather than the principal, as a requirement by the obligee.
This difference can be described in terms of the risk of loss: with an insurance policy, it’s the insurance company that holds the risk -- but in a surety bond, the principal takes on the risk. The risk transfer in surety is handled through an indemnity clause that’s part of the principal’s bond application.
For example, an auto insurance policy will pay you for damages to your car in the event of an accident. But with a surety bond, the surety company pays your customer if you or your employee damage their car -- and in most cases, you’re ultimately responsible for reimbursing the surety company for their initial payout to the customer.
When Do You Need a Surety Bond?
Situations that will typically require a surety bond include:
- Needing a business license. While specific rules vary by state and even county, certain industries require a company to obtain certain surety bonds before being allowed to conduct business. These are often called license & permit bonds, and are commonly required for companies dealing with construction, motor vehicles, and professional contracting services, from landscaping to private investigation. If you fail to fulfill your obligation or follow the rules of your profession, a customer can make a claim against your bond.
- Starting a construction project. Most contractors are required to obtain a surety bond before entering a construction contract; these are often called contract bonds and can be focused on specific parts of the agreement. For example, a bid bond guarantees the contractor will follow through on the project, and a payment bond guarantees it will pay all suppliers and subcontractors for their work and expenses.
- Participation in a court proceeding. A court of law might require a defendant to secure a court bond. Common instances include cost bonds, indemnity to sheriff bonds, and replevin bonds. Because they’re viewed as especially high-risk, they almost always require the principal to post collateral.
- Protecting your business. Fidelity bonds protect a business from theft, fraud, and embezzlement by its employees. Most states require companies that offer benefit or pension plans to acquire these bonds to protect them against fraud committed by the plan administrator.
How to Get a Surety Bond
Who Issues Surety Bonds?
Surety bonds are usually issued by insurance companies, banks, and various types of brokers and agencies. An institution that issues surety bonds is licensed and regulated by the state in which it operates, typically via the state’s insurance commission.
Why Choose World Insurance Associates?
We're experts in the surety and bonding arena, and take pride in making a detail-heavy process laden with specific details a simple one for our clients.
We offer a wide variety of options -- including specialized coverage to meet unique, specific needs -- to guarantee your commercial and personal obligations are met.
Our Express Bonds Program even allows you to obtain a contract bond in as fast as 24 hours, minus the extensive paperwork, lengthy underwriting requirements, and minimum financial limits.
We provide world-class asset and lifestyle protection with bond insurance, risk management, and benefit consulting services for individuals and businesses. Our excellent reputation allows us to work with the best insurance underwriters, and employ the most talented professionals in the industry. We partner with several AM Best A-rated, U.S. Treasury Listed sureties that are licensed to handle any bonding needs, in all 50 states.
Our firm provides group benefits, surety bonds, and insurance policies to companies of all sizes and industries. We have particularly extensive experience in solutions for companies working in transportation, hospitality, self-storage, non-profit work, construction, manufacturing, and law.
Our commitment to efficient and convenient service means customers benefit from features such as online claims reporting and access to policy summaries, and the ability to print your own insurance certificates on demand when it's convenient for you.
What to Expect During the Surety Bond Process
As is customary for legal documentation, the surety bond process involves its fair share of paperwork and bureaucracy -- but that’s what World Insurance is here to handle. Our client feedback consistently praises how we make the process simple and cost-effective for them, rendering the experience stress-free.
1. Apply
Submit basic information about yourself, your business, and your bond needs. This step only takes a few minutes.
2. Evaluation and Underwriting
We’ll also collect information in order to determine your surety bond rate, examining three main areas:
- Credit: Surety bond rates are largely based on the credit history of the applicant (principal).
- Experience: Whether or not you’ve obtained successful surety bonds in the past will also determine how much you pay for your bond. Have you ever had a surety bond canceled, refused renewal, denied? Have you had a license suspended or revoked? Do you have any pending lawsuits, judgments, or liens? Have you ever been convicted of fraud or a felony?
- Finances: Your past financial performance helps determine how risky it is to bond you or your company. Have you ever filed bankruptcy? Have you or any company owned by you ever had to shut down due to finances?
3. Receive a Quote
Every entity that offers surety bonds has its own set of underwriting rules and prices, so prices vary widely among providers.
After the evaluation process, World Insurance will provide you with your surety bond quote and answer any questions you have.
4. Sign an Indemnity Agreement
As the principal, you’re required to sign this document that states you agree to pay back the full amount of the bond you’ve filed.
5. Make the Payment
You won’t be required to pay the full amount of the bond up front; rather you’ll pay a percentage of the total bond amount, depending on your evaluation. You may set up a payment plan to spread this cost out over a series of months.
Frequently Asked Questions About Surety Bonds
How much are surety bonds?
The price you pay for a surety bond depends on the type of bond you need, you and/or your company’s financial history, and the amount of the debt obligation.
You won’t be required to pay the full amount of the bond up front; rather you’ll pay somewhere a percentage of the total bond amount, depending on your evaluation. You may set up a payment plan to spread this cost out over a number of months.
How are surety bonds calculated?
A surety bond rate is based on risk factors related to the client and the type of bond needed. The general areas evaluated are the type of bond, the applicant’s risk level (including financial history), and bond amount.
How long are surety bonds good for?
Most surety bonds feature an expiration date, and many are renewable -- if the bond covers a specific job, and you’ve completed that job, there’s no need to renew the bond.
The expiration date can be virtually any length of time the principal requests, from months to years.
In the case of a bond related to a specific project, the obligee may be required to sign to release you from the bond at the project’s completion.
Are surety bonds transferable?
No. Surety bonds cannot be transferred between principals, because requirements and risk levels vary by entity and location.
Are surety bonds cancellable?
A surety bond can only be cancelled under specific circumstances. Bonds differ from insurance in that the policyholder (principal) is not the one being protected from loss -- a third party (the obligee) is, and is usually the one to require the surety bond in the first place, so they must agree to its cancellation.
Bonds will typically include a provision about circumstances under which cancellation may be permissible.