What is a surety bond?
A surety bond is an agreement that backs a specific obligation. It helps protect the party requiring the bond, or others covered by its terms, if the person or business responsible for that obligation fails to meet it.
Who is involved?
A surety bond has three parties, as described in the National Association of Insurance Commissioners glossary:
- Principal: the person or business responsible for the obligation and obtaining the bond.
- Obligee: the party requiring the bond, such as a licensing agency or project owner.
- Surety: the company that backs the principal’s obligation under the bond.
For example, a licensing agency might require a contractor to obtain a license bond. The bond backs the contractor’s obligation described in the bond and applicable rules.
How does a claim work?
If the principal fails to meet the bonded obligation, an eligible party may make a claim. The surety reviews the claim against the bond’s terms and applicable law. A bond does not mean every complaint will result in payment. Depending on the bond and circumstances, the surety’s response may involve payment or another remedy.
If the surety pays a valid claim, the principal generally must reimburse the surety under the indemnity agreement. Read that agreement and the bond terms carefully before signing.
When might you need one?
A government agency may require a commercial bond for a license or permit. A project owner may require a contract bond, such as a performance or payment bond. The U.S. Small Business Administration explains common contract and commercial bonds. Requirements depend on the work, location and agreement, so check with the party requiring the bond.
What does a surety bond cost?
The bond amount and the premium are different. The bond amount is the stated limit of the surety’s obligation under the bond; the premium is the price paid for the bond. The premium depends on the bond and the surety’s review of the applicant. Ask for a quote and review the terms, including any renewal requirements.
Is a surety bond insurance?
Surety bonds and business insurance serve different purposes. A bond backs an obligation to another party; general liability insurance generally protects a business against covered third-party injury or property damage claims. A business may need both. Read more about surety bonds and general liability insurance.
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