Frequently Asked Questions About Surety Bonds
Q: What is a Surety Bond?
In layman’s terms, surety bonds guarantee that a given task is fulfilled. The three parties involved in surety bonds, the Principal, the Obligee and the Surety Company agree to a legally binding contract. Surety bonds protect consumers and hiring parties against any form of abuse, fraud, deception, sudden bankruptcies, and penalties.
The 3 parties in a surety bond are:
- The Principal – is an individual or business entity that purchases the bond and is guaranteeing to fulfill a specific contractual task.
- The Obligee – Is the entity that is protected by the surety bond. In short, the Obligee is expecting the Principal to perform a specific task. Often it a government agency that requires a Principal to secure a surety bond.
- Surety Company – the company or insurance firm that issues and backs the bond. A Surety Company is essentially extending a line of credit to the Principal in case they fail to perform as expected. In the event of a "claim", a Surety Company might initially pay the claim to the Obligee, however, they expect to be fully reimbursed by the Principal.
For a visual aid to help explain Surety Bonds, check out our Surety Bond Infographic.
Q: How much does a Surety Bond Cost?
The cost of a surety bond depends on the type of bond you require. Be aware that some bonds are inexpensive and some are quite expensive. Each surety bond has its unique cost structure. But in general terms, surety bonds cost between 1% and 15% of the total value of the bond. Industries that pose an elevated risk, like construction, require construction bonds that cost up to 10% or above of the bond’s value.
Q: What is the Process of Getting a Surety Bond?
The process of getting a Surety Bond is usually very simple. First, you must determine the type of surety bond and the dollar amount that you need. Next, you file an application with the Surety Company and ask for computation of the premium (cost) of the bond. After a bond premium has been determined, the Surety Company will give you a copy of the bond agreement and you will pay the premium. You will receive a signed copy of the agreement and an original copy of the bond together with a Power-of-Attorney from the Surety.
For simpler surety bonds, it’s often possible to do the entire process utilizing our “online” platform.
Feel free to contact us by phone and we will walk you through the process. We can be reached at 800-333-7800.
Q: How long does it take for my Surety Bond Application to be approved?
It depends on the type of bond. In some cases, the entire process can be completed in a few minutes. For complicated bonds, the process can take multiple days.
Q: Do I need collateral for a Surety Bond?
Collateral is often not required. It depends on the risk and circumstances related to the particular bond you are requesting. More information about types of collateral.
Q: What are the differences between a Surety Bond and an Insurance Policy?
Surety bonds involve at least three parties under contract. The Obligee is the party who is the recipient of an obligation or the party being protected by the bond by transferring his or her risk to a Surety Company who guarantees to the Oblige that the Principal would be able to perform his or her contractual obligations.
Unlike a traditional insurance policy where the Principal pays an ongoing premium for coverage, surety bonds are part insurance and part credit. To put it simply, surety bonds are insurance policies for the Obligee that are backed and paid for by the Principal. The Surety sits in the middle – offering a guarantee of payment to one party and collecting the payment (if a claim is made) from the other party. When the Principal purchases a surety bond, they are buying a line of credit. The Surety Company is simply saying, “I trust you, Mr. Principal, to complete the contract for the Obligee.”
On the other hand, insurance is a two-party contract. Insurance is represented by an insurance policy in which an insured individual or entity receives financial protection or reimbursement against any losses from an insurance company by transferring the risk to the insurance firm. Insurance companies can provide such protection by ensuring a large pool of clients of similar risk to make payments more affordable for the insured. Using the premiums paid by several insured persons or entities, the insurance company makes profits that enable them to pay out any claims against the policy.
Q: What if I have a "claim" on a Surety Bond?
Because of the nature of Surety Bonds, a "claim" is a rare event. However, if you need to file a claim on a Surety Bond, it is critical that you immediately contact the Surety Company. The Surety Company will want to investigate the circumstances related to the claim. The Surety Company usually has different options to indemnify the Obligee (the recipient of the obligation).
Q: What are the different types of Surety Bonds?
There are thousands of different types of Surety Bonds. Broadly, Surety Bonds fit into these 6 categories;
- Construction Bonds (aka Contract Bonds) guarantees that an entity awarded a contract will meet its obligations under that contract. Included in this group are bid bonds, performance bonds, payment bonds, maintenance bonds, and supply bonds.
- Subdivision Bonds (a cousin of the aforementioned "contract bond") guarantee that developers/builders will make certain improvements in accordance with local, state, and federal guidelines/laws.
- Commercial Surety Bonds include many different business obligations which require surety bonds. Commercial Surety Bonds include all non-contract surety bonds, including numerous types of license and permit, miscellaneous, and court bonds.
- License & Permit Bonds guarantee that individuals that have been granted a license/permit to operate a particular type of business will meet the obligations under that license/permit.
- Miscellaneous Bonds include a variety of miscellaneous non-classifiable obligations. This includes a large number of bonds that don't comfortably fit into the other categories.
- Court Bonds guarantees that an individual will comply with the terms/obligations of the court. This includes Fiduciary Bonds (such as trustee bonds and probate bonds) and Judicial Bonds (such as appeal bonds and bail bonds).
Q: How do I choose the correct Surety Bond Company?
As a rule of thumb, not all Surety Bond companies provide the same level of service or products to their clients. Some Surety Bonding companies, especially the big ones, will not accept applicants who have questionable credit standing and only take clients with a strong personal credit rating. But, there are Surety Companies that have programs that are designed to provide you will all your bonding needs. Before applying to any Surety Company, choose a firm that you are comfortable working with or those you are sure would be able to meet your needs.
Surety Bond Authority is a full-service surety bond company that is built on a foundation of integrity. As an essential partner for all your surety bond requirements, Surety Authority prides itself on stellar customer service and affordable rates.
Backed by twenty-five years of experience, Greg Rynerson, CEO, and Founder of Surety Authority has spent his career in the surety bond and insurance industries. Throughout the course of his professional life, Greg has been proud to execute bonds at the state and federal level for his clients.