EDUCATION CENTER

Frequently Asked Questions

1. What is a surety bond?
2. What is a surity bond?
3. What is a security bond?
4. How do I get bonded?
5. How do surety bonds work?
6. Why become bonded if I'm required to pay for claims?
7. How much does a surety bond cost?
8. Why do I need to get my business bonded?
9. What's the difference between a "principal" and an "obligee"?
10. How long does getting bonded take?
11. How do surety bond renewals work?
12. What is the difference between being bonded and insured?
13. What's the difference between Commercial and Contract Bonds?

What is a surety bond?

A surety bond is a three-party guarantee. Exactly what is guaranteed will depend on the specific type of surety bond involved. Surety bonds are not insurance, but instead are a form of credit.

When dealing with contracting, a surety bond is more specifically a three-party agreement between a principal (the contractor), an obligee (government or project owner) and a surety. The surety assures the obligee that the principal will perform in accordance with the terms of an official contract.

For a more in depth explanation as to what a surety bond is click here: What are Surety Bonds?

What is a surity bond?

"Surity Bond" is a common mispelling of the term "Surety Bond." See the question above for a brief definition of surety bond.

What is a security bond?

"Security Bond" is another common mispelling of the term "Surety Bond". As you can see, security, surity and surety all sound very similar to one another.

How to get bonded

The first step toward obtaining a surety bond is applying for one. Agents can typically get an approval within 1-4 days of receiving an application, and some can offer instant approval. Upon being approved, the agent will provide you with the premium cost for your bond along with a contract between you and the selected bonding company. In most cases, the actual surety bond will be issued within 1-2 business days of the receipt of payment and the signed indemnity agreement.

How do surety bonds work?

The individual who purchases the surety bond (the principal) pays a bond premium, which is a certain percentage of the total bond amount. The surety then gives the principal what is known as a surety credit in order to make the guarantee. Principals must follow the terms of the specific bond or a claim may result. If after investigation the surety determines that a claim is valid, they will look to the principal to pay for the claim as well as any legal fees that may be required.

Why become bonded if I'm required to pay for claims?

A false misconception about surety bonds is that they are a form of insurance. Surety bonds are instead a form of credit whereby principals are required to provide payment for claims. The primary benefit of obtaining a surety bond is that they will rarely require the principal to provide collateral, which can act to free up capital. Payments made by principals for bond premiums are usually less than the principal could earn if they were to make conservative investments with the capital made available. This makes surety bonds more attractive than alternatives such as posting cash or obtaining a letter of credit.

How much does a surety bond cost?

Premiums for surety bonds vary depending on a number of factors such as the type of bond involved, strength of the applicant, the obligee, and surety risk preference. Applicants' credit can be heavily weighted, which is why people may be offered different rates for the same bond. Usually, applicants can expect to pay anywhere between 1-3% in standard markets, but higher risk markets may cause rates to be between 5-20% of the total bond amount.

Why do I need to get my business bonded?

Surety bonds are needed because some entity (private/government) requires that a bond be purchased in order to allow a principal (contractor, etc) to operate. By purchasing the required surety bond, the surety assures the obligee that the principal will operate per the terms of the agreement.

For more information click here: Why do I need a surety bond?

What's the difference between a "principal" and an "obligee"?

An "obligee" is the person or entity that requires the principal to purchase the surety bond. The person purchasing the surety bond is the "principal". In regards to contract bonds, the principal would be the contractor purchasing the contract bond and the obligee would be the person/entity that the contractor will be working for. With most commercial bonds, the obligee will be a department of the government.

How long does getting bonded take?

Different surety bond types may require different amounts of time to obtain. When it comes to bond approval, some bond types can be approved within just minutes, but most take between 1 and 4 days to make it through the approval process. Once payment is received for the bond, most can be issued to the principal between 24 and 48 hours.

How do surety bond renewals work?

To understand the basics of surety bond renewals, click here: The Surety Bond Renewal Process.

What is the difference between being bonded and insured?

For reasons why surety is not the same as insurance, click here: Surety Bonds vs Insurance.

What's the difference between Commercial and Contract Bonds?

Commercial Bonds and Contract Bonds (also known as Construction Bonds) are the two primary categories of surety bonds, but are distinct from one another in a few obvious ways. As the name implies, contract bonds are exclusively for contractors involved in construction projects. Examples include bid and performance bonds, maintenance bonds, payment bonds, site improvement bonds, subdivision bonds and supply bonds. For more information on contract bonds click here: Contract Bonds

Commercial bonds are surety bonds that do not come with contracting guarantees. Over the past several years, the commercial surety bond market has grown substantially. While in the not so distant past, commercial bonds were often referred to as simply "non-contract surety bonds", today that is no longer the case due to the vast amount of commercial bond types and the frequency with which they are being written. Insurers throughout the country have been working to develop innovative, new products for commercial surety customers, which has increased competition and help further boost the market's growth. To read more about commercial bonds click here: Commercial Bonds