What is a Surety Bond?
A surety bond is a legally binding three-party agreement that guarantees one party will fulfill their obligations to another. Learn how surety bonds work, who needs them, and how to get bonded today.
Quick Answer
A surety bond is a contract among three parties: the principal (business that buys the bond), the obligee (party requiring the bond), and the surety (company guaranteeing the obligation). If the principal fails to meet their obligations, the surety pays the obligee—then the principal must repay the surety.
The Three Parties in a Surety Bond
Principal
The business or individual who purchases the bond and is obligated to perform. Examples: contractors, auto dealers, notaries.
Obligee
The party requiring the bond for protection. Usually a government agency, project owner, or licensing authority.
Surety
The insurance company that guarantees the principal's performance and backs the bond financially.
How Surety Bonds Work
Principal Obtains the Bond
A business applies for a bond from a surety company and pays a premium (typically 1-3% of the bond amount).
Bond is Issued to Obligee
The surety issues the bond, which is provided to the obligee (licensing agency, project owner, etc.).
Principal Performs Obligations
The principal operates their business, completes projects, or fulfills license requirements.
If a Claim Occurs
If the principal fails, the obligee files a claim. The surety investigates and pays valid claims up to the bond amount.
Principal Repays Surety
The principal must reimburse the surety for any claims paid—this is the key difference from insurance.
Surety Bonds vs. Insurance
Insurance protects the policyholder—the insurer absorbs losses. Surety bonds protect third parties—the principal must repay any claims. A surety bond is essentially a line of credit, not a transfer of risk.
Types of Surety Bonds
Surety bonds fall into three main categories based on their purpose.
Contract Surety Bonds
Required for construction projects to guarantee completion and payment.
Learn MoreCommercial Surety Bonds
Required for business licensing and regulatory compliance.
Learn MoreCourt Surety Bonds
Required for legal proceedings and estate administration.
Learn MorePopular Bond Types
How Much Does a Surety Bond Cost?
You pay a premium (typically 1-3% of the bond amount), not the full bond amount.
Example: $25,000 Contractor License Bond
Factors Affecting Cost
- Credit score (higher = lower rates)
- Bond type and amount required
- Business experience and financials
- Industry and risk level
Typical Premium Rates
- Excellent Credit (750+)0.5-2%
- Good Credit (700-749)1-3%
- Fair Credit (650-699)3-5%
- Poor Credit (<650)5-15%
Who Needs a Surety Bond?
Construction Professionals
- General contractors
- Specialty trade contractors (electrical, plumbing, HVAC)
- Subcontractors on bonded projects
- Government contract bidders
Licensed Businesses
- Auto dealers and vehicle salespeople
- Mortgage brokers and lenders
- Freight brokers and motor carriers
- Collection agencies
Professionals
- Notaries public
- Insurance agents
- Tax preparers
- Immigration consultants
Legal & Fiduciary
- Estate administrators
- Guardians and conservators
- Appellants in court cases
- Court-appointed trustees
Federal Requirement: Miller Act
The Miller Act (40 U.S.C. 3131) requires performance and payment bonds for all federal construction contracts exceeding $150,000. Most states have similar "Little Miller Acts" for state and municipal projects.
Frequently Asked Questions
What is a surety bond in simple terms?
How much does a surety bond cost?
What is the difference between a surety bond and insurance?
Who needs a surety bond?
Can I get a surety bond with bad credit?
How long does it take to get a surety bond?
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