What Is A Surety Bond?
What Is A Surety Bond?
Surety Bond Definition: A guarantee provided by a surety company, which varies by line of work and bond form language, as both items are used to assess risk to the surety. Surety bonds are not insurance for you, they are a form of credit provided by the surety. If you do not fulfill the guarantee and cause damages, a claim can be filed that the surety will initially pay. However, the surety company will come to you for reimbursement.
Before a surety bond can be issued, an indemnity agreement must be signed which guarantees you will reimburse the surety in the event of a valid claim. Watch our video to learn more about surety bond claims.
There are several surety bond categories which include:
- License & permit/miscellaneous bonds
- Contract bonds
- Court bonds
- Public official bonds
A license bond is needed in order to become bonded and licensed. It is required by various government departments to obtain a license. The license bond will vary by occupation, however they all guarantee you will follow the regulations set by the department requiring the bond.
Miscellaneous bonds include any surety bonds that do not fit under the license and permit, contract, court or public official categories. They also guarantee that regulations will be followed, and can be required by government departments or third party entities. Visit our bond catalog for a full list of license, permit and miscellaneous bonds.
Contract bonds are guarantees that the terms of a contract will be satisfied. They are usually required by:
- Local/federal governments
- General contractors bidding out projects to sub-contractors
- Private entities
Private entities requiring contract bonds are often limited to larger companies, e.g. Fortune 500 companies. Sureties generally do not write bonds for smaller companies, as they are unfamiliar with the product and process.
Contract bonds are usually needed for construction projects, but can also be required for non-construction service contracts such as:
- Trash collection contracts
- Janitorial contracts
- Software installation contracts
For a full list of contract bonds, visit our contract bonding catalog.
A court bond is a guarantee that an individual or organization will fulfill their duties as stated by law or the court, and are required by state, local or federal courts. Visit our court bond catalog and find a full list of court bonds.
Lastly, what is a public official bond?
Public official bonds are guarantees that an elected public official will perform their duties honestly and in accordance with county, municipality or state law. They are required by state and local governments for positions such as:
- Tax collectors
- Court clerks
Take a look at our public official bond general information page to find out more about public official bonds.
Woman: I'm told I need to post a surety bond, but I have no idea what they do.
JW: It can be confusing, but I think I can help. Simply put, a bond is a guarantee of something. Who is requiring the bond of you?
Woman: The Department of Motor Vehicles told me I need the bond to get my auto dealer's license.
JW: In that case, the bond is in place to guarantee you follow the state's regulations when operating your dealership. The DMV would be the "obligee" (pronounced ob-li-jee) since they are the party requiring you to post the bond.
Woman: So does that mean I have to give the DMV cash for the bond amount?
JW: No, you would pay a bonding company a percentage of the bond amount to make the guarantee on your behalf.
Woman: So does the bond protect or insure me and my business?
JW: Not at all. It protects the public in the event you break the DMV's rules. Think of it as insurance for your clients, that you are paying for.
Woman: Aaaahhh, now I see.
JW: There are thousands of surety bond requirements throughout the country for just about every profession you can think of. With all of them, there are always three parties...the obligee who is requiring the bond, the bonding company backing it, and you the principal being "bonded".
Woman: You've really helped to clear things up. Thank you so much!
JW: No problem. However, I'd suggest you watch our video "Why you need to avoid claims at all costs". There is a lot you don't know and I want to make sure you understand how a claim could be detrimental to your business.