Surety bonds come in many forms, but they all share the same basic structure: a three-party agreement where a surety company guarantees that a principal will fulfill an obligation to an obligee. The specific type of bond you need depends on your industry, the work you perform, and the requirements set by the government agency or project owner you are working with. Below is an overview of the major categories of surety bonds and the most common bond types within each.
License and permit bonds are the most common type of surety bond. They are required by state, county, and city governments as a condition of obtaining a business license or permit. The bond guarantees that the licensed business will comply with all applicable laws, regulations, and codes governing their industry. If the business violates those requirements and causes financial harm to the public, affected parties can file a claim against the bond to recover their losses.
Examples of license and permit bonds include contractor license bonds, auto dealer bonds, mortgage broker bonds, freight broker bonds (BMC-84), tax preparer bonds, and notary bonds. The bond amount and requirements vary by state and profession. Many of these bonds are affordable, with annual premiums starting as low as $50 to $100 for applicants with good credit.
Contract bonds are used in the construction industry to guarantee that a contractor will fulfill the terms of a construction contract. There are three primary types of contract bonds. A bid bond guarantees that a contractor will honor their bid and enter into a contract at the bid price if selected. A performance bond guarantees that the contractor will complete the project according to the contract specifications. A payment bond guarantees that the contractor will pay all subcontractors, laborers, and material suppliers involved in the project.
Contract bonds are required on most public works projects under the federal Miller Act and similar state-level statutes. They are also commonly required on large private projects. The cost of contract bonds depends on the contract size, the contractor's financial strength, credit history, and experience, with typical premiums ranging from 1% to 3% of the contract value for qualified contractors.
Fidelity bonds protect businesses against financial losses caused by dishonest acts of their employees, such as theft, fraud, or embezzlement. While technically a form of insurance rather than a traditional surety bond, fidelity bonds are commonly grouped with surety products because they serve a similar protective function. Businesses that send employees into clients' homes or offices, such as janitorial companies, cleaning services, and home health aides, frequently purchase fidelity bonds to reassure their customers.
ERISA fidelity bonds are a specific type required by federal law for any business that manages an employee benefit plan. These bonds protect plan participants against losses caused by acts of fraud or dishonesty by plan fiduciaries. Business service bonds and janitorial bonds are other common forms of fidelity coverage that protect clients from employee theft while workers are on the client's premises.
Court bonds are required in various legal and judicial proceedings. They guarantee that a party involved in a court case will fulfill their obligations as ordered by the court. Common types of court bonds include appeal bonds (also called supersedeas bonds), which allow a party to delay payment of a judgment while an appeal is pending, and fiduciary bonds (such as executor bonds, administrator bonds, and guardian bonds), which guarantee that a person appointed to manage another's assets will do so faithfully and in accordance with the law.
Other court bonds include attachment bonds, replevin bonds, and injunction bonds, each serving a specific purpose within the legal system. Court bond requirements and amounts are typically set by the presiding judge or by statute.
The type of bond you need is determined by the entity requiring it. If a government agency requires a bond as part of a license or permit application, the bond form or application instructions will specify the exact bond type and amount. If you are bidding on a construction project, the bid documents will outline the contract bond requirements. If you are unsure which bond you need, a surety bond agent can help you identify the correct bond based on your industry, location, and the specific requirement you have received.