Surety Bonds – Partners Risk

What is surety?

Surety is an agreement between three parties whereby a third-party entity (the surety, e.g., Commercial Surety) stands behind a company or individual (principal) and promises to provide a guarantee to the other party(obligee) that the principal will fulﬁll an obligation. If the principal fails to do so, the surety will complete the work or pay the obligee the bond penalty, then recoup the cost from the principal.

Types of Surety Bonds

Contract Surety Bonds

Contract Surety Bonds are bonds the government or an owner of a construction project may require a contractor to obtain. There are three types of contract surety bonds.

Bid Bond

This bond protects a project owner(obligee) in the event the successful bidder does not enter into a contract and does not provide the required surety bonds or other security.

Performance bond

This bond protects the obligee if the contractor defaults on its obligations under the bonded contract.

Payment bond

Guarantees that the contractor will pay their subcontractors, labor and material costs associated with a bonded contract.

Commercial Surety Bonds

Commercial surety bonds are required of individuals or businesses by the government, legislation or by other entities.

License and permit bonds – required by state, municipal or federal ordinance or regulation. These bonds may be required as a condition for engaging in a particular business or exercising a particular privilege. Examples include performance and payment bonds, customs bonds, tax bonds and warehouse bonds.

Court bonds, including:

Judicial bonds, required of either a plaintiff or defendant in judicial proceedings, to reserve the rights of the opposing litigant or other interested parties.

Fiduciary bonds – required of those who administer a trust under court supervision.
Public official bonds – required by statute for certain holders of public office to protect the public from malfeasance by an official or from an official’s failure to faithfully perform duties.
Notary bonds – surety bond required by statute for a notary public and guarantees a notary will protect the public from financial harm as a result of the notary failing to perform required notarial procedures.

How to apply for a surety bond

Your city, county and state have different requirements for how to get a surety bond. It is important for you to understand what type of bond a particular obligee requires and in what amount to get a surety bond. You should then contact your independent insurance agent to understand how to apply for a surety bond. They will guide you through that process, which will include:

Evaluation and qualification – you will be required to provide financial documents to demonstrate your creditworthiness and that you have the resources to fulfill the terms of the surety bond. You will also be required to provide details about the project that will be covered by the bond.
Underwriting – Surety underwriter will assess the risk to bond you and may offer a formal agreement requiring your indemnification in the event of a loss along with other required responsibilities.
Bond issuance – the surety bond will be issued for you to sign and deliver to the other party (obligee).

How much do surety bonds cost? The cost (known as the premium) of a surety bond depends on a number of things, including the bond type, length of time for coverage, risk, the principal’s credit score and past claims history, financial wherewithal, and other factors. Depending on that information, the surety bond premium can vary.

Each state and its governing agencies set their own surety bond requirements. The obligee will inform you if they require a bond, the bond type and the amount of coverage.

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