Common Types of Surety Bonds & How They Work
Insurance Neighbor • May 19, 2022
A surety bond is a contractual agreement designed to fulfil certain commitments
- The Principal: The individual who is required to have a surety bond.
- The Obligee: The individual requesting the bond.
- The Surety Company: The company guarantees payment to the Obligee in a claim.
Types of Surety Bonds
- Contract bonds: These bonds are put in place and are often required for large construction projects. These are the most common type of surety bonds and are put in place to protect the Obligee when the Principal fails to meet their contractual obligations. The bonded party is financially liable.
- Commercial bonds: A commercial bond may require some commercial legal entities to obtain a license. These bonds are geared to ensure that professionals act legally and ethically when practicing their profession. A party that violates these standards is held liable.
- Court bonds: A court bond may be required in some legal proceedings. These bonds are most often required in civil proceedings.
- Fidelity bonds: These surety bonds protect businesses and their clients if an employee acts unlawfully. Many business owners add this added layer of protection to their business insurance portfolio. A fidelity bond can be of great benefit to business owners who face legal repercussions due to the actions of an employee.
Contract Surety Bonds
- Bid bonds: These bonds are put in place to guarantee that a contractor can deliver the work as submitted in a bid.
- Performance bonds: These surety bonds protect the Obligee if a contractor does not complete a project as written by the contractor.
- Payment bonds: These bonds protect an Obligee should a contractor fail to pay subcontractors on a project and are typically a requirement for contractors on federal and commercial projects.
- Maintenance bonds: These surety bonds are often referred to as "warranty bonds." They are put in place to protect the project owners from losses associated with faulty materials or poor workmanship on a project.
Commercial Surety Bonds
- License and permit: If you are applying for a professional license, you may be required to purchase and submit a license or permit bond.
- Mortgage broker: Mortgage broker bonds are put in place to protect borrowers should a mortgage broker fail to operate ethically as required by the state.
- Others: Other types of surety bonds may be required by liquor companies, utility providers, warehousing firms, auto dealers, and many other business activities.
Need a Surety Bond?
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