Our surety bonds department helps clients create bond programs tailored to their needs.
What is a Surety Bond?
A surety bond can be confusing, but we’ll break it down for you. First, it’s important to know that a surety bond is not the same as insurance. This website will help you understand the differences more clearly.
A surety bond involves an agreement among three parties:
- Principal – This is you (or your business). The principal is responsible for fulfilling the contract or obligation.
- Obligee – The obligee requires the bond. This could be a government agency or private organization that wants assurance that the principal will do their job.
- Surety – The surety company guarantees that the principal will meet their obligations. If the principal does not fulfill their obligation, the surety intervenes.
A surety bond provides a guarantee that the principal will meet the necessary requirements set by the obligee. The surety acts as a backup to ensure the job gets done.
How Do Surety Bonds Work?
The process starts when an obligee requires a principal to obtain a surety bond. This shows that the principal is capable of fulfilling their responsibility.
For example, suppose you own a construction company and have a government contract to build a road. The government (obligee) may require a surety bond to ensure you complete the project. The surety company will review your business to confirm can handle the job.
What Happens if You Don’t Fulfill the Contract?
If the principal fails to meet the contract terms, the surety company will ensure the work gets done. However, the principal must then repay the surety for any costs incurred.
Surety bonds have specific terms, typically lasting one to three years, or until the contract is completed. Some may include an extended period for maintenance in case of issues.
How to Find the Right Surety Bond
To determine the type of surety bond you need, contact the obligee requiring the bond. They will tell you the type and amount needed. Requirements vary by state, county, and city, so it’s best to confirm with the obligee.
What Information is Needed for a Surety Bond?
Unlike regular insurance, surety bonds require detailed documentation. This may include:
- Personal and business financial statements
- Resumes of key personnel
- References
Each surety bond company may have additional requirements. These documents help show that you are qualified and responsible.
Surety Bonds vs. Insurance
Although surety bonds are often purchased through insurance companies, they are different from insurance:
- Surety bonds guarantee that a principal will meet an obligation; insurance covers unexpected losses.
- Surety bonds require a one-time payment, while insurance usually involves monthly premiums.
Types of Surety Bonds
There are many surety bonds, but the most common ones are:
- Contract Bonds – Used in construction to ensure a contractor completes a project.
- Commercial Bonds – Needed to ensure businesses comply with legal and safety regulations.
- Court Bonds – Protects plaintiffs and defendants from financial loss.
- Fidelity Bonds – Protects businesses from fraud or employee dishonesty.
