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What is a Surety Bond?

Posted by: Insurance Place by: September 3, 2015

What is a Surety Bond?

What is a Surety Bond?


The legal definition of a surety bond is a form of insurance between a business, a client and a third-party surety bond company that guarantees that contracted work will be completed and protects the business in the event that the contract obligations are not met. This helps build trust between a company and client and provides piece of mind for both parties.


While many companies have business liability insurance, it doesn’t protect anyone if contracted work fails to be completed. Depending on your agreement,  the contractor may be held responsible for failing to meet the contract obligations and could owe a large sum of money to the client. Many small businesses are not equipped to handle these payment penalties and a surety bond can protect you from costly mistakes. Either the surety company will find another contractor to finish the project or will compensate the client for any financial loss due to the failed contract.


Surety bonds help increase the credibility of a small business contractor by ensuring that customers will get what they pay for. This is helpful for businesses as it holds you accountable to the contract and provides assurance to the client that you can be trusted to complete the work. In addition to businesses, surety bonds are also commonly used in the construction business.


What are the Different Types of Surety Bonds?


The types of surety bonds vary depending on the business. For instance, construction contractors require a different form of surety bond than a commercial business owner.


There are four varieties of surety bonds in the construction business: bid bond, payment bond, performance bond and ancillary bond.


    • Bid bonds take place before the official acceptance of a project and promises that the bidder will provide both payment and performance bonds if they are offered the contract.


    • Payment bonds guarantee that suppliers and subcontractors will be paid for work performed under the contract.


    • Performance bonds ensure that the terms and conditions of the contract are met by the contractor.


    • Ancillary bonds make sure non-performance-related requirements are met according to the contract.



Commercial surety bonds protect consumers from being taken advantage of by businesses. Some of the most common surety bonds for commercial businesses include auctioneers, car dealerships and mortgage brokers.


When is a Surety Bond Necessary?


Although a surety bond may be required for many jobs at the state and city levels, it’s mandatory for federally-financed jobs over $150,000. Businesses may need a surety bond to guarantee payment of utility bills or state sales tax. The regulations with surety bonds vary by state so be sure to check what surety coverage is necessary in your area.

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