What is a surety bond?

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. So what is a surety bond? In its most simplistic of explanations, a surety bond is somewhat like a professional co-signer. The surety company basically promises the agency requiring the bond that you will follow the rules. This means abiding by codes required of licensees. It can also mean following the terms of a contract. Surety bonds of the latter are contract bonds and the former commercial bonds.

There are literally thousands of different types of surety bonds. Scores of business licenses across the country require a surety bond as part of the license process. From New York State Nail Salons to Car Washes in California, companies need surety bonds to be licensed.

What does the surety bond do?

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. 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.

What are performance bonds?

What is a surety bond? 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.

What is a bid bond?

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.

If I made a mistake on my bid would a claim on my bid bond be made?

"Definition of the low bidder; the contractor that the made the biggest mistake"  Unknown

Suppose you are the low bidder on a public works project and soon after realized the only reason you were the low bidder is because you made a mistake. Fear not, in these instances you have the legal right to retract your bid. It must be done quickly and you may have to provide a detailed explanation. Usually a good indication that a mistake may have been made is if there is a large bid spread between yours and the next bidder.

Who issues surety bonds?

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.