The Major Categories of Surety Bonds

Category: Uncategorized
Published: Jan 12, 2009
To understand surety bonds, and how they work, it is best to start off by breaking them down into larger groups or categories. There are two major categories of surety bonds: Contract and Commercial Bonds. In this article, I will briefly explain what each of the previously listed bond types guarantees, and will also provide you with a few examples of each.

The first category of bonds I will discuss are contract bonds. Contract Bonds are purchased by a contractor (or principal) from a surety at the request of a project owner (obligee), and essentially provide obligee with assurance that the principal will perform in accordance with the terms of the contract (i.e. complete the work, pay subcontractors, material suppliers, etc.).

Examples of Contract Bonds:

  • Bid Bonds – Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds.
  • Construction Bonds – These are bonds designed to guarantee the performance of obligations under a construction contract.
  • Payment Bonds – These bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers and materials suppliers associated with the project.
  • Performance Bonds – Guarantee performance of the terms of a contract by a contractor.
  • Site Improvement Bonds – These bonds guarantee that any public property that was disturbed or altered during the conduct of a private project will be completely restored upom completion of the project.
  • Subdivision Bonds – May be required by local government to ensure that landowners follow-through and complete mandatory public improvements made to their property by builders.

The next category of bonds we will cover are commercial bonds.  There are litterally hundreds of different types of Commercial Bonds, which guarantee the obligee that the principal (purchaser of the bond) will perform per the terms outlined on their specific license, etc.  The obligee for this type of bond is typically some sort of government entity.

Some examples of the many types of Commercial Bonds are:

  • ARC Bonds – Required by the Airlines Report Commission.
  • Auto Dealer Bonds – Bonds required by each state to ensure auto dealers abide by state regulations.
  • Broker Bonds – The different types of Broker Bonds available are Freight Broker, Insurance Broker and Mortgage Broker Bonds.
  • Cigarette Tax Bonds – Cigarette distributors may be required to obtain this type of bond to ensure payment of taxes.
  • Collection Agency Bonds – Bonds required by a governing body to ensure collection agencies operate within rules and regulations.
  • Freight Broker Bonds (BMC-84) – These federally-mandated bonds must be obtained by freight brokers to ensure delivery of brokered goods.
  • License & Permit Bonds (not listed) – Due to the very high number of bonds nation-wide that fall under this category, this link will provide general information on license & permit bonds.
  • Liquor Tax Bonds – Bonds required to guarantee the payment of taxes collected on liquor and other alcoholic beverage sales.
  • Mortgage Broker Bonds – Bonds that are required by many states to ensure that mortgage brokers operate in accordance with all pertinent rules and regulations of that particular state.
  • Sales Tax Bonds – Required by the government to ensure timely payment of sales tax by a company.
  • Telemarketing Bonds – These types of bonds are required by the state to ensure that telemarketers, or phone solicitors, follow all rules and regulations set forth by that particular state in the conduct of their solicitation.

Contract and Commercial Bonds can also each further broken-down into many more sub-categories (i.e. A License & Permit Bond is a sub-category of Commercial Bonds), and some of these sub-categories can have numerous different types themselves.  Each and every sub-category of surety bond is underwritten differently by the surety bond companies, and there may also be different application requirements for each types as well.

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