Usually the first time anyone has even heard of a surety bond is when they are asked to provide one. As part of licensing a business or a construction project, a bond may be required.
You can think of a surety bond as a professional co-signer. The surety company promises the agency requiring the bond that you will follow the rules. This might mean that you must follow the terms of a contract or abide by the codes of a business license.
A surety bond is a three-party obligation. The three parties are:
Principal – This is the person who is asked to provide the bond. For example, if you’re trying to license your business and your state government requires you to provide a surety bond, you are the principal.
Obligee – This is the party requiring the bond. For example, state governments require many business owners to provide a surety bond in order to become licensed.
Surety – The surety is the company that backs the bond. If the surety has to pay a claim, the surety will look to the principal for reimbursement.
Since surety bonds are such a niche product that many people aren’t familiar with, they’re often referred to by the wrong name.
Surety bonds are mistakenly called:
None of those terms describe actual surety or insurance products—it’s always a “surety bond” that you’re asked to provide.
Surety bonds fall under these broad categories:
License & Permit Bonds – Government agencies require this type of bond for businesses in certain industries. These bonds need to be bought before the business can legally be licensed. License and permit bonds protect customers because the bond guarantees that the business will abide by the laws and regulations enforced by local, state, and federal agencies.
Court Bonds – Court bonds are required by a court of law for legal circumstances. Most are for the purpose of verifying a person’s financial or personal integrity. For example, if you’ve been appointed as the executor of an estate, the court may request a surety bond to ensure the proper administration of the estate.
Construction (Contract) Bonds – A construction bond guarantees that the contractor working on a construction project will fulfill the promises of the contract. If the contracted party does not abide by the contract and the bond, a claim can be filed against the bond and their license could be taken away. In the duration of the project, the project developers may require the contractor be bonded by several different types of bonds, including bid, supply, payment, and performance bonds.
Surety1 writes all of the most common surety bonds, including the following:
In most states, both new and used motor vehicle dealers are required to post a Motor Vehicle Dealer Bond as part of the auto dealer licensing requirements. These bonds are, of course, also referred to as auto dealer bonds or car dealer bonds.
When the title of a vehicle is damaged or cannot be produced, the Department of Motor Vehicles (DMV) generally requests that you obtain a surety bond. The bond is a requirement of many states. This bond is also referred to as a: Defective Title Bond, Lost Title Bond, or Certificate of Title Bond.
There are over 300 ports of entry into the United States and the U.S. Customs & Border Protection (CBP) agency has jurisdiction over them all. Ports of entry conduct the daily, port-specific operations like clearing cargo, collecting duties and other monies associated with imports. A customs bond assures payment of duties and monies owed the CBP.
Surety1 has the expertise to place almost any size bond and will be a valuable business partner if a company wants to grow its surety capacity. In addition to performance bonds for construction contracts, Surety1 has expertise in placing performance and payment bonds for service contracts like security contracts, janitorial, and even Information Technology projects.
Surety1 can write any type of bond that you need, and we’re licensed in all 50 US States. Take a look at our Bond Info Center to find the bond you need.
Visit Types of Surety Bonds to learn more about the most common types of surety bonds.
Take the California Car Wash Surety Bond as an example. This is a $150,000 surety bond required if you want to operate a hand car wash in the State of California. This license bond is larger than most and it is in place to protect the employees of the car wash. For example, some car wash owners would deduct tips from the wages of the car wash employees and this is in violation of state law for this industry.
If the state receives a claim, they will audit the car wash and may determine that the car wash did not abide the required law. If so, a claim will be made on the bond. Important point to keep in mind, however, the bond does not protect the owner of the car wash. If a claim is made on the bond and the surety has to pay out on the bond, the surety will seek repayment of the loss, including its legal fees from the car wash and its owners.
Performance bonds are a type of surety bond that guarantees the performance of a particular contract. Often issued in conjunction with a payment bond, these bonds guarantee the completion of a project and payment of all sub contractors and suppliers.
If a contractor is required to post a performance and payment bond on a project and then fails to complete the project, the surety will hire a replacement contractor to complete the project and pay all unpaid subcontractors and suppliers at no additional cost to the owner. Like the above example, if the surety company pays a claim, it will seek restitution from the contractor for its loss.
Like most surety bonds, most people have never even heard of a bid bond until they are asked to provide one. Bid bonds are most often used in the bidding process for public works projects. The bond guarantees that the low bidder will enter into a contract and provide the required performance and payment bonds. If the low bidder cannot enter into the contract, the bid bond would cover the difference in cost between the low bidder and the 2nd bidder.
Surety bonds are sold through independent insurance agencies throughout the United States. Despite the fact that surety bonds are more of a financial product than insurance, insurance companies provide the actual bonds through its agents. Given the specialization required, there are several independent insurance agencies that specialize in just surety bonds. To provide surety bonds to the federal government, the insurance company must be on the Department of the Treasury’s Listing of Approved Sureties. Often referred to as the “T-list” many states and municipalities will also require the surety to be on the list.
Many surety bonds are “instant issue” meaning no credit report will be reviewed. Of those that do require a credit check and your credit has some challenges, we can work with you to get you the surety bond you need so you can continue to build equity in your business. Surety1 works with many secondary surety markets to get you the best possible quote. Learn more about bad credit surety bonds.
1. The first step is to complete an online application. Applying is free and no-obligation.
2. Next, the agent who is in charge of your bond will contact you with a firm quote.
3. You’ll get instructions on how to provide payment and your signed agreement, then we’ll mail out your bond! Many are sent within the same business day.