To completely understand suretyship, one must know the major categories and sub-categories of surety bonds. There are two main surety categories: contract bonds and commercial bonds. Below, we will discuss what each of these bond types guarantee and give example bond types that would fall under each category.
Contract Bonds: provide financial security and assurance on specific contracts by assuring the project owner (obligee) that the contractor (principal) will perform the work and pay certain subcontractors, laborers, and or material suppliers.
- Bid Bonds guarantee that the bidder will perform the contract at the amount bid. In the event the bidder has been awarded the project the bonding company will provide the performance, payment and maintenance bonds (if required).
- Performance Bonds guarantee the principal will perform the contract per its terms and conditions
- Payment Bonds guarantee the principal will pay subcontractors, laborers, and material suppliers.
- Maintenance Bonds guarantee against defective materials or craftsmanship for a specified period.
- Subdivision Bonds guarantee that the principal will finance and construct certain improvements (ie street, sidewalks, curbs, gutters, sewer, and drainage systems).
Commercial Bonds: guarantee the performance of the principal as listed on the bond.
- License & Permit Bonds guarantee a licensee will operate per the terms of the license the bond is filed with. (ie auto dealer bond, mortgage broker bond, telemarketing bond, etc.)
- Public Official Bonds guarantee the performance of a public official.
- Miscellaneous bonds guarantee lost securities, contributions to union fringe benefits, payment of utilities, leases, and workers compensation.
- Judicial and Probate Bonds guarantee the performance of fiduciary services in compliance with a court order (ie executor bonds, guardianship bonds, appeal bonds, etc. Also known as fiduciary bonds.)
Each of the two categories has multiple sub-categories. The sub-categories often have numerous different bond types. There are literally thousands of different license and permit bonds in existence. With so many different bond forms out there, an agent will often stumble upon one he/she has never dealt with.
Bonding companies underwrite each of the sub-categories differently. While there are many commonalities, there are also many differences in what is required to apply for each sub-category.
If you are applying for a bond, it is not necessarily all that important to know what category your bond falls under. However, if you are trying to learn about suretyship in general, knowing the categories and how they differ is an absolute must.