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Surety Bonds

What is a Surety Bond?

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For certain industries and professions, Surety Bonds are an important tool commonly used to reduce risk for companies. These bonds essentially provide a guarantee that contractual obligations will be met, giving one party in the agreement confidence and a financial safety net in hiring another party in the agreement.

What is a Surety Bond?

A Surety Bond is a legally binding agreement that provides a guarantee that a company or individual will deliver on their obligations. Surety Bonds help to ensure a company or person will complete the duties it has promised to carry out. There are always three parties involved in a surety bond:


How do Surety Bonds work?

You purchase a Surety Bond to guarantee that you will fulfill professional or contractual obligations and pay a premium. If you fulfill the obligations (e.g. complete the project), the bond company will not have to pay out anything. If you do not deliver on all your obligations as agreed upon, the obligee can file a claim against your Surety Bond. The bond company will investigate the claim to determine whether you are responsible for the failure to meet obligations and pay out the claim accordingly if it is judged to be valid. However, unlike insurance policies, you will be expected to reimburse the surety company at some later date.

Are Surety Bonds insurance?

It’s important to note that Surety Bonds are not insurance policies. Rather, Surety Bonds provide lines of credit. While insurance companies will incur a loss in paying out claims, settlements, or the cost of a legal defense, surety companies do not expect to incur a loss from issuing a surety bond. Surety companies require the principal to sign an indemnity agreement that obligates them to repay the surety company for any costs or losses incurred. The surety company expects to be repaid under the contract signed and can sue the principal if they are not reimbursed.

Why are Surety Bonds needed?

Winning Business

Since Surety Bonds are typically a guarantee of performance, they can help companies secure more business. Moreover, in many cases, government and private contracts will require a Surety Bond in order to participate in the bidding process or upon award of the contract. Securing a Surety Bond may be a basic condition of your company being in the running to win a contract.

In cases where a Surety Bond is not required, getting bonded can help your company stand out from competitors and provide peace of mind to clients that their assets will be protected. With a Surety Bond, your company can demonstrate its financial strength, as there is a rigorous review process in order to secure a bond that not all companies will be able to successfully pass.

Government Contracts

Surety Bonds also play an important role in protecting taxpayer dollars from the failure of contractors to deliver on projects. Since the failure of contractors to meet obligations on government projects has been a visible problem for more than a century, the federal government has passed landmark legislation to combat this issue—and virtually all state governments have followed with their own statutes.

Today, many government contracts require a Surety Bond. All federal contracts over $100,000 require Surety Bonds and most federal contracts of lesser value also require them. When a company purchases a Surety Bond, it transfers the risk of failure from the government to the surety company.

What are the different types of Surety Bonds?

Contract Surety Bonds

Contract Surety Bonds make a guarantee to owners of construction projects (the obligee) that the contractor (the principal) will meet the obligations of the project. If the contractor fails to deliver the project specifications or engages in harmful business practices, the surety company will find another contractor to complete the project or reimburse the project owner. These are the main types of Contract Surety Bonds:

Commercial Surety Bonds

Commercial Surety Bonds include a number of different types of bonds that generally are required by various regulations, ordinances, and entities, including federal, state, and local governments, to protect the public interest, helping to ensure that individuals and businesses adhere to the rules and regulations that protect the public. Commercial Surety Bonds typically fall into the following four categories:

How do you get a Surety Bond?

In order to secure a Surety Bond, you’ll need to first determine what type of bond you need. Once you’ve determined what type of bond you’ll need, you can then apply for the bond through an appropriate surety. Depending on the bond type, there are a variety of bond companies and insurers that offer Surety Bonds—some companies specialize in offering specific types of bonds or bonds for certain industries.

When you apply for a Surety Bond, your business will be evaluated in order to determine your ability to meet current and future contractual obligations. In this underwriting process, the surety may look at your business’s:

Once approved, you’ll receive a quote for your Surety Bond. It may be to your advantage to shop for multiple quotes and look for a suitable fit for your business and project.

How much does a Surety Bond cost?

The cost of a Surety Bond depends on a number of factors, including:

Surety Bond premiums generally fall between one and ten percent of the total bond amount. Much of the pricing of a Surety Bond depends on your personal credit score, where lower credit scores correlate with higher premium percentages.

In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable bond company or insurer. Below we’ve highlighted a few of our trusted partners who offer Surety Bonds:

ProviderSurety BondGeneral LiabilityCommercial Property

What is the SBA Surety Bonds Guarantee Program?

The Small Business Administration offers a Surety Bond Guarantee Program to assist small and emerging businesses. Small businesses may struggle to qualify for Surety Bonds sold by surety companies due to a lack of capital, credit, or capacity. The SBA Surety Bond Guarantee Program requires less working capital, which gives more small businesses a chance to qualify for Surety Bonds. Small businesses can qualify for up to $6.5 million on projects to any owner (private, local, state, or federal), and up to $10 million on federal jobs available to prime contractors.

Final Word

For any project or profession, there is always the risk that the work will not be completed in a satisfactory manner. In general, Surety Bonds provide a guarantee that the insured party will meet obligations. If the obligations are not met, then the Surety Bond will pay out a sum to the project owner. Surety Bonds are an important tool in helping companies secure business and reducing risk for organizations.

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