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What is a Surety Bond?

A bond is issued by an entity known as the "Surety" on behalf of a second party, the "Principal," guaranteeing that the Principal will fulfill an obligation or series of obligations to a third party, the "Obligee." If the Principal fails to meet these obligations, the Obligee can recover its losses through the bond.

Although Surety bonds are typically issued by insurance companies, they are not a form of insurance. Instead, they represent a financial assurance provided by the Surety to the Obligee (often a government entity), ensuring that monetary damages will be paid if the Principal defaults, fails to uphold its promises, or becomes insolvent.

Surety bonds are required for various government jobs, construction projects, and court mandates. Additionally, certain industries must obtain bonds from federal, state, or local governments before a business license is issued to protect citizens.

The Principal pays a premium in exchange for the Surety's commitment to guarantee the bond(s) to the Obligee. If the Principal defaults and the Surety is insolvent, the bond becomes worthless. This is why insurance companies, whose financial strength and solvency are verified by private audits and/or governmental regulation, are typically authorized to underwrite Surety bonds.

In the event of a claim, the Surety will investigate, pay, and usually seek reimbursement from the Principal for the claim amount paid plus any legal fees incurred. In some cases, when the Principal is unable to fulfill its obligations, the Surety may choose to "Subrogate," which involves substituting for the Principal to fulfill the terms of the obligation and/or recovering damages.

Definitions

What Types of Surety Bonds Are Available?

Contract Surety

Utilized heavily in the construction industry by general contractors as a part of construction law, a guarantee from a Surety to a project owner (the Obligee) that a contractor (the Principal) will adhere to the provisions of a contract.

1.Bid Bond: Guarantees that the bidder will carry out the contact at the bid price if bid is awarded; Provides protection especially in circumstances when the Obligee has accepted the lowest cost bid that the project will be completed even if the contractor has under bid.

2.Performance Bond: Guarantees that a Principal has the financial resources to complete the job from start to finish. If the contractor fails to complete the project in accordance with the terms of the agreement, the surety company will either complete the contract itself, or arrange for a contractor approved by the Obligee to complete the contract.

3.Payment Bond: Guarantees that Principal will pay the subcontractors and material suppliers involved the project.

4.Maintenance Bond: Guarantees for a specified time period against defects and faults in materials, workmanship, and design that could arise later if the project was finished incorrectly.

Commercial Surety

Provides permission to perform work under the conditions that the Principal will conduct business in accordance with the local, state and federal laws. Commercial bonds typically cost less than Contract bonds and are easier to obtain because of their decreased risk.

1.License & Permit Bonds: Guarantees to a government and its constituents (the Obligee) that a Principal will comply with an underlying statute, state laws, ordinances, and regulations. Examples include the following: Motor Vehicle Dealer Bonds and Real Estate Broker’s Bonds.

2.Court Bonds: Guarantees to a government that the Principals whom courts have entrusted with the care of property or welfare of another person will faithfully perform their specified fiduciary duties as ordered by the court. Examples include Appeals Bonds, Replevin Bonds, and Bail Bonds.

3.Public Official Bonds: Guarantees the honesty and faithful performance of Principals who are elected or appointed to positions of public office. Examples of officials who may require bonds include: notaries, treasurers, judges, and law enforcement officers.

4.Miscellaneous Bonds: Bonds that cannot be categorized within the afore mentioned categories covering Obligees with unique needs. Examples include Hazardous Waste Removal Bonds and Guarantee Bonds.

Fidelity Bonds

Also known as employee dishonesty bond, covers theft of an employer’s property by its own employees. Though referred to as bonds, fidelity is a two party contract more resembling a traditional insurance policy rather than a surety bond.

Developer Surety

exclusively used by developers mainly for residential projects but also for commercial projects.

1.Subdivision: guarantees that a residential developer will perform its obligations to the municipality under the subdivision agreement

2.Warranty Bonds: can be called on in the event the developer fails to abide by the warranty provisions required by jurisdictional laws

3.Purchaser’s Deposit: allows a purchaser to defer the payment of some of these deposits until the purchaser occupies the condominium unit.

4.Condominium Deposit Insurance (CDI): guarantees that the deposits will be repaid to the purchaser if the developer fails to deliver the purchaser’s condominium in accordance with the purchase agreement.

5.Excess Condominium Deposit Insurance (ECDI): guarantees the return of the purchasers’ deposits paid in excess of the amounts required by law

How Is A Bond Purchased?

A bond is typically purchased via local insurance agents who represent the surety. However, many insurance companies have begun to issue Surety Bonds directly to Principals in an effort to reduce risk and commissions paid to agents. Bond costs vary dependent on bond type, the Principal’s credit history, financial performance, and many other factors that are taken into consideration by underwriters. In addition, fees may be assessed by the Obligee and/or the Surety. But typically, the cost (referred to as “the Premium”) is usually between 1 and 4 percent of the total bond amount needed (also known as “the Penalty” or “the Penal Sum”).

Other Resources

Australian Surety Association

Forum for the exchange of ideas, the promotion of surety and deposit bonds and the opportunity for networking.

International Credit Insurance & Surety Association (ICISA)

In order to support improving and developing the specialized services its members give the business world.

National Association of Surety Bond Producers (NASBP)

An association of and resource for surety bond producers and allied professionals.

Panamerican Surety Association (PASA)

Group of Sureties primarily focused on Latin and South America

Surety & Fidelity Association of America (SFAA)

A trade association consisting of companies that collectively write the majority of surety and fidelity bonds in the United States.

Surety Association of Canada (SAC)

Association that represents the interests of the surety industry across Canada

Surety Information Office (SIO)

IA Surety information resource maintained by both NASBP and SFAA

SuretyLearn.org

Online Orientation and Resources on Surety Bonding for Small, Emerging Contractors

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What is a Surety Bond?

Definitions

What Types of Surety Bonds Are Available?

Contract Surety

Commercial Surety

Fidelity Bonds

Also known as employee dishonesty bond, covers theft of an employer’s property by its own employees. Though referred to as bonds, fidelity is a two party contract more resembling a traditional insurance policy rather than a surety bond.

Developer Surety

How Is A Bond Purchased?

Other Resources

Australian Surety Association

International Credit Insurance & Surety Association (ICISA)

National Association of Surety Bond Producers (NASBP)

Panamerican Surety Association (PASA)

Surety & Fidelity Association of America (SFAA)

Surety Association of Canada (SAC)

Surety Information Office (SIO)

SuretyLearn.org

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