Surety bond FAQ

A surety bond is a three party agreement in which one company, the surety, guarantees to a second party, the obligee, that a third party, the principal, will meet a specific obligation. If the principal does not meet it, the surety is answerable for the shortfall up to the face amount of the bond.

In practical terms, it is a financial guarantee backed by a licensed surety company, put in place because someone requires proof that you will do what you agreed to do.

• The Principal. The party being bonded. Usually you or your business.
• The Obligee. The party requiring the bond and receiving its protection. Often a government agency, a court, or a project owner.
• The Surety. The company that issues the bond and stands behind the guarantee.

As your agency, we sit alongside this arrangement rather than inside it. We identify the bond you need, take it to the surety best suited to write it, and issue it once it is approved.

It guarantees that the principal's obligation will be performed. If the principal fails to perform, the surety steps in and satisfies the obligation, either by arranging for the work to be completed or by compensating the obligee up to the bond amount.

No, and the difference matters more than most people expect. They are often sold by the same companies and overseen by the same regulators, but they work in opposite directions.

Insurance is a two party contract that transfers your risk to the insurer. Losses are expected, and premiums are priced with those losses in mind. A surety bond is a three party guarantee that protects the obligee, not you, and the surety approves it expecting no losses at all.

The sharpest distinction is what happens after a claim. If your insurer pays a claim, that is the end of it. If a surety pays a claim on your bond, you are legally obligated to reimburse the surety in full.

Any individual, partnership, or corporation that meets the surety company's standards. There is no single bar to clear, because the requirements scale with the bond type and amount. A small license and permit bond may need little more than an application and a credit check, while a large contract bond involves a full financial review.

Sureties evaluate what the industry calls the three C's.

• Character. Your track record and reputation for honoring commitments.
• Capacity. Whether your business can actually perform the obligation.
• Capital. Whether your financial position supports it.

Every surety weighs these three differently, which is why the market a file goes to matters as much as the file itself. A submission one carrier declines is one another will write.

Nearly any obligation can be bonded. The two most common are the performance of a contract or service and the payment of a sum of money. If a statute, license, court order, or contract requires a guarantee, there is usually a bond for it.

Both sides, in different ways. The obligee gets a financial guarantee from a company with the resources to stand behind it. The principal gets access to work, licenses, and legal remedies that would otherwise be closed off, because without the bond many contracts cannot be awarded and many licenses cannot be issued.

There are hundreds of them. The ones we write most often are bid, performance, payment, subdivision, license and permit, lost instrument, court, and fidelity bonds. Our Services page lists every bond type we place, grouped into contract, commercial, and fidelity.

It guarantees that if you are awarded a contract you bid on, you will enter into that contract and furnish the required performance and payment bonds. Bid bonds are typically written for 5 to 10 percent of the bid.

One point that catches contractors out: you have to prequalify for the full contract amount, not for the bid bond amount. Winning the job means posting bonds at 100 percent of the contract, so the surety looks at whether you could carry the whole thing.

It guarantees you will complete a project according to the terms of your contract. These are usually written at 100 percent of the contract value, and they typically run for the duration of the contract plus any warranty period. If you default, the surety is responsible for seeing the work completed.

It guarantees that your subcontractors, laborers, and material suppliers get paid, even if you default. Also usually written at 100 percent of the contract value, and almost always issued as a pair with the performance bond.

Worth knowing: the claimants on a payment bond are your subs and suppliers, not the project owner. Plenty of contractors assume it protects the owner.

Sometimes called a plat or improvement bond. A developer posts it to guarantee that required public improvements, such as roads, sidewalks, drainage, or utilities, actually get completed. The obligee is the municipality or county, so the guarantee runs to the public rather than to a private owner.

A bond a government agency requires before it will issue your license or permit. It guarantees you will operate in compliance with the statute or ordinance governing that license. These cover an enormous range of businesses, from contractors and motor vehicle dealers to collection agencies, auctioneers, and sellers of travel.

Used when a financial instrument such as a stock certificate, cashier's check, or savings bond has been lost or destroyed and you need the issuer to replace it. The bond protects the issuer in case the original instrument resurfaces later and someone else presents it for payment.

A bond a court requires as a condition of taking some action in a legal proceeding. They fall into two broad families.

• Fiduciary bonds such as probate, guardianship, administrator, and executor bonds, which guarantee that someone entrusted with another party's assets handles them faithfully.
• Judicial bonds such as appeal, supersedeas, replevin, and release of lien bonds, which protect an opposing party from loss while a matter is being litigated.

Court bonds are frequently time sensitive, so calling is usually faster than filling out a form.

A fidelity bond covers losses caused by dishonest or fraudulent acts of your own employees, including theft, fraud, and embezzlement. Unlike most surety bonds, this one protects the bonded business itself, which makes it the closest thing in surety to a conventional insurance product.

An ERISA bond is a specific type of fidelity bond that federal law requires of anyone who handles the funds of an employee benefit plan, such as a 401(k), pension, profit sharing, or retirement plan.

Under ERISA section 412, each plan official generally must be bonded for at least 10 percent of the funds handled in the preceding year. The bond can never be written for less than $1,000, and the required amount is capped at $500,000 per plan, or $1,000,000 for plans that hold employer securities.

Because the required amount moves with the plan's assets, it is worth rechecking as the plan grows. A bond that satisfied the requirement a few years ago may no longer be enough.