What is a Surety Bond?

Surety Bond Image

A surety bond is a legally binding contract between three parties: the principal, the obligee, and the surety company.

  • The Principal: you as a business owner.
  • The Obligee: the entity requiring the bond.
  • The Surety: the insurance company that backs the bond.

It is a financial guarantee to the Obligee on behalf of the Surety that the Principal will complete a service in agreement with the regulations stated in the surety bond.

That All Sounds Grand, but What Does it Mean in Layman’s Terms?

If a government or its citizens incur damages as a result of a business failing to uphold the regulations stated in the surety bond, the person(s) harmed may make a claim on the surety bond. The surety company will then investigate that claim and—if it is deemed valid—will reimburse the claimant for damages up to a certain amount (the bond limit). The surety company will then contact the principal (and any other indemnitors who are liable on the bond) and demand repayment of any damages. In this way, a Surety bond is very different from regular insurance: the obligation for payment of any damages ultimately rests with the bond principal/indemnitors.

What is an Indemnitor and How Does it Differ from a Principal?

The Principal(s) is the person(s) or the business name stated on the bond. This is the entity whose actions the bond covers.

The Indemnitor(s) is the person(s) who is held financially responsible for any damages within the terms of the bond. In almost all cases, the principal is an indemnitor, as well as anyone else with ownership of the business and their spouses. Spouses are included to prevent any transferring of assets in the case of a claim.

Two Main Groups of Surety Bonds

Commercial Bonds: Up to this point we’ve primarily discussed Commercial Bonds, which are the majority of bonds most small business and individuals run into. Commercial Surety Bonds are often related to a specific license or permit. Some of the most common bond types include:

  • Motor Vehicle Dealer Bonds: These bonds are a required component of the dealer licensing process in most states, and ensure that dealers conduct business ethically and lawfully.
  • Vehicle Title Bonds: Title bonds are required in situations where a vehicle’s title is lost, stolen, or otherwise invalid. This “bonded title” then allows the vehicle owner to obtain a vehicle registration.
  • Contractor License Bonds: These bonds ensure protections for consumers who suffer damages as a result of defective construction or other license law violations.
  • Tax and Tax Preparer Bonds: Tax bonds ensure the payment of taxes owed and/or the preparation of those taxes.
  • Freight Broker Bonds: The most common transportation bond is known as BMC-84, which guarantees the delivery of goods and payment of suppliers by transportation brokers.
  • Court Bonds: Court bonds often deal with the guardianship of minors/adults or the management of deeds and estates.

Commercial Bonds cityscape image

There are over 10,000 different types of commercial bonds within the United States. Some of the most fun and interesting surety bonds that we’ve come across include:

If you are looking for a commercial bond, you can access and apply for thousands of them directly online at EZSuretyBonds.com.

Contract Bonds: Contract Surety Bonds are a little different. These bonds provide financial security to the project owner (Obligee) that the contractor (Principal) will perform the work and pay their subcontractors, laborers, and material suppliers. The most common Contract Surety Bonds include:

  • Bid Bonds: A financial guarantee that the bid has been submitted in good faith, that the contractor intends to enter into the contract at the price bid as well as provide the required performance and payment bonds.
  • Performance Bonds:This protects the project owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions
  • Payment Bonds:Guarantees that the contractor will pay their laborers and suppliers so there are no liens at the end of the project.
  • Maintenance Bonds:Guarantees over a specified time period that the work will either be maintained, or if completed, there will be no defects regarding the workmanship or the materials.

Most Contract Surety Bonds are associated with the construction industry, however, there are some instances in which non-construction related contracts may be bonded. Common industries that require a bonded contract include security guard services, janitorial services, transportation, and material suppliers. If you need a contract bond, contact us and we will be happy to assist you.

How to Know if You Need a Surety Bond

You’ll know if you need a surety bond because some entity will have required you to obtain one. They must also inform you of which specific bond type you’ll need. There are thousands of bonds across the country, all of which vary by state and industry.

Visit EZSuretyBonds.com to browse hundreds of bonds by state, type, or industry.

Visit EZSuretyBonds.com to purchase your surety bond.

Version: 202006-003