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Surety Bond FAQs

December 3, 2021

Frequently Asked Questions about Surety Bonds are Answered Below:


What is a Surety Bond?


A surety bond is a three party guarantee between a Principal (the party making the guarantee) the Obligee (party receiving the guarantee) and a Surety (the third party bond company backing the Principal’s guarantee). 


A Surety Bond Guarantee - This shows the three way relationship between a Surety, Obligee and Principal on a Surety bond.


Type of Surety Bonds

Surety Bonds fall into three major categories and several sub categories. These include Contract Surety Bonds,  Commercial Surety Bonds, and Fidelity Bonds.


Types of Surety Bonds - This is a chart showing Contract Surtety Bonds, Commercial Surety Bonds and those that fall in between. A light blue background with papers at the bottom.


Contract Bonds


Contract Bonds guarantee contracts. Usually these are construction contracts but also include service contracts such as Janitorial Bonds, Security Contracts, etc.


Contract Bonds include Bid Bonds, Performance Bonds, Payment Bonds, Maintenance Bonds, Supply Bonds, and Developer Bonds. However, Developer Bonds can also be considered Commercial Surety.


Contract Bonds are mandated on all Federal projects over $150,000 through the Federal Miller Act. Most states and municipalities have enacted similar requirements when public funds are involved. Private Owners and General Contractors also frequently require these bonds as a way to manage their project risk.


Commercial Bonds


Commercial Surety Bonds are the second major category of Surety Bonds. Commercial Surety Bonds encompasses many sub categories. These include License and Permit Bonds, Court Bonds, Public Official Bonds and Miscellaneous Bonds.


Fidelity Bonds

Fidelity are the third major category of Surety Bonds. Fidelity Bonds include Erisa Bonds, Financial Instituion Bonds and Employee Dishonesty Bonds.


How Do Surety Bonds Differ From Insurance?


Despite what you may think or read, Surety bonds are not insurance. In fact they are quite different products. 


Surety is a credit product. It is more closely related to banking than insurance. A company or individual must qualify financially to get a Surety bond. Additionally, they must agree to reimburse a Surety bond company if a loss occurs under the indemnity agreement.


Surety also assumes no losses and is priced accordingly. Surety Bonds would be unaffordable if they were priced like insurance policies. 


Alternatively, property and casualty insurance is not based on financial underwriting. It is offered and priced according to a company’s industry, the expected losses for that industry, and the company’s own loss history. Insurance pricing includes a certain amount of expected losses.


If a loss does occur, a company or individual is usually only financially responsible up to a deductible and coinsurance.


It is easy to understand why there is confusion. Property Casualty insurance companies are often the same companies that write surety bonds. Both products are regulated by the Department of Insurance and the same licensing is required to sell both.


However, few insurance professionals truly understand surety bonding and vice versa. Surety Bonds are not insurance and should not be treated as such by any party.


How Do You Get a Surety Bond?


It really depends on the type of obligation and the size of the Surety bond. Many bonds can now be issued instantly with a simple personal credit check.


Larger surety bonds and Bond programs require full underwriting. This includes collecting both company and individual financial statements, applications, resumes, job schedules and other underwriting information. Contract Bond underwriters look at Character, Credit, and Capacity. You can read more about that here.


Can I Get a Bond With Bad Credit, Bankruptcy, Judgements or Liens?


Generally surety bonds are obtainable even with bad credit or other credit blemishes. In instances where an individual or company has strong financial resources, and a history of success, it may be very easy to obtain  a Surety bond.


In other situations, it may require the use of a specialty surety bond company or the use of Surety tools such as The SBA Surety Bond Guarantee Program, funds control, and/or collateral.


Generally the most difficult situations involve tax liens. The U.S. Government will take priority over other creditors so tax liens will usually need to be paid or full collateral will likely be required to get a Surety bond.


What Do Surety Bonds Cost?


Surety Bond Cost - This gives the cost range for surety bonds. Its a green box with money in the background



The cost of a Surety bond depends on a number of factors. The two most important are the type of obligation and the qualifications of the Principal.


A typical range for Surety bonds is 0.5% – 3% of the bond amount. Contract Bonds are typically a one time cost for each project while commercial bonds generally renew each year and the premium is also due each year that the bond is in place.


Do I Have to Sign Personally to Get a Surety Bond?


Generally the answer is yes. Most surety bond companies take into account the owner(s) personal assets when deciding to write a Surety bond. For companies, owners with 15% or more ownership in the company stock will generally be asked to personally indemnify.


There are exceptions. Companies with very strong net worth positions may be able to get surety bonds with only the company’s indemnity. However, not every surety bond company will consider this and it is usually limited to companies with over $1 million in analyzed net worth.


Why Does My Spouse Have To Sign?


If an individual is required to personally indemnify the Surety bond company, the spouse will be required to as well. This prevents couples from transferring or sheltering assets. A bond company may be willing to exclude some assets if they are of sentimental value only.


Can Surety Bonds Be Cancelled?


This depends on the type of bond. Most court bonds including probate bonds cannot be cancelled until they are released by the court. Contract Bonds are also not cancellable They are in place until the underlying obligation has been fulfilled. Most types of commercial Surety bonds can be cancelled. However there is usually a notice requirement to the Obligee.


Are Surety Bonds Refundable?


Surety bonds that can be cancelled (see above) can usually have the unearned portion of the guarantee refunded. This is not always the case as some obligations are fully earned once the bond is written.


Other surety bonds such as contract bonds cannot be refunded because they are non-cancellable. If a Principal can get the contract bonds returned from the Obligee before the project starts, then they may be refundable.


Do Surety Bonds Require Collateral?


Generally no. A Surety bond is considered unsecured credit because they do not make a UCC filing against the Principal’s assets unless a claim occurs. That said there is an indemnity agreement in place that requires the Principal to make the Surety bond company whole for any loss.


There are instances when Collateral may be required for Surety bonds. These are generally when either the Principal cannot qualify without it, or when the bond is guaranteeing a difficult obligation.


What is a Dividend in Surety?


Dividends are not common in surety. However, some states such as Texas do have dividend plans. In Texas, contractors are eligible for a dividend once their bonded project concludes without any claims. The amount of the dividend varies by bond company.


Are Electronic Surety Bonds Valid?


Electronic Surety Bonds are valid as long as they are issued by a licensed Surety bond company and bond broker. These electronic bonds still need to be sealed with the Surety bond company’s seal. They must also include a power of attorney and be signed by an individual listed on the power of attorney.


What is a T-Listing?


T-Listing is an abbreviation for the United States Treasury 570 circular. This is a listing of all the Surety bond companies who are approved by the U.S. Government. A corporate Surety bond company must be on this list for the Government to accept a contract Bond. The listing also provides a value for the largest bond the Government will accept from each company?


What if I Need Surety Bond Larger Than My Bond Company’s T-Listing?


Most corporate Surety bond companies have agreements with reinsurance companies or other bond companies for when larger bonds are needed. They simply use the other company’s paper to issue the bond.


What a Surety Bond Rating?


Many obligations require that a Surety bond is rated “A-” or better. This is a rating of the bond company’s financial strength. This is an indication of the Surety bond company’s ability to pay their obligations. A very popular rating service is A.M. Best


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