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What Is a Surety Bond? How They Work and Why You Need One

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Have you ever wondered what a surety bond is and why you might need one?

A surety bond is a type of contract that guarantees that one party will fulfill their obligations to another party. It can protect you from financial losses, legal disputes, and regulatory penalties.

In this post, you will learn the basics of surety bonds, how they work, and why they are important for many businesses and individuals.

Whether you are a contractor, a business owner, or a consumer, you will find valuable information and tips on how to use surety bonds to your advantage. Read on to discover more about this useful financial tool.

What is a Surety Bond?

A surety bond is a contract that guarantees the performance or payment of one party to another. It involves three parties: the principal, the obligee, and the surety.

The Three Surety Bond Parties Involved

In this section, you will learn about the roles and responsibilities of the three surety bond parties: the principal, the obligee, and the surety. 

The Obligee

The obligee is the party that requires the surety bond and benefits from its protection. The obligee can be a government agency, a private entity, or an individual. The obligee sets the terms and conditions of the bond and can make a claim against the bond if the principal fails to meet their obligations.

The Principal

The principal is the party that obtains the surety bond and agrees to fulfill their obligations to the obligee. The principal can be a contractor, a business owner, or an individual. The principal is responsible for paying the bond premium and any fees or costs associated with the bond. The principal is also liable for reimbursing the surety if the surety pays a claim on their behalf.

The Surety

The surety is the party that issues the surety bond and guarantees the principal’s performance or payment to the obligee. The surety can be an insurance company, a bank, or a bonding company. The surety evaluates the principal’s creditworthiness, financial stability, and experience before issuing the bond. The surety also has the right to investigate, defend, or settle any claims made against the bond.

Types of Surety Bonds

Surety bonds are contracts that guarantee the fulfillment of certain obligations by one party to another. There are four main types of surety bonds: contract, commercial, fidelity, and court bonds.

  • Contract bonds
    • These are bonds that guarantee the performance or payment of a specific contract, usually in the construction industry. Examples include bid bonds, performance bonds, payment bonds, supply bonds, maintenance bonds, and improvement bonds.
  • Commercial bonds 
    • These are bonds that guarantee the compliance of a business or an individual with various laws, regulations, or contractual obligations. Examples include license and permit bonds, public official bonds, tax bonds, and utility bonds.
  • Fidelity bonds
    • These are bonds that protect a business or an organization from losses caused by dishonest or fraudulent acts of its employees. Examples include employee dishonesty bonds, business service bonds, and ERISA bonds.
  • Court bonds
    • These are bonds that guarantee the fulfillment of certain duties or obligations related to a court proceeding. Examples include appeal bonds, probate bonds, guardianship bonds, and attachment bonds.
 

Contract Surety Bonds

Contract surety bonds are bonds that guarantee the performance or payment of a specific contract, usually in the construction industry. Some examples of contract surety bonds are:

  • Bid bonds
    • These bonds ensure that the contractor who wins the bid will enter into the contract and provide the required performance and payment bonds.
  • Performance bonds
    • These bonds ensure that the contractor will complete the project according to the contract terms, specifications, and schedule.
  • Payment bonds
    • These bonds ensure that the contractor will pay the subcontractors, suppliers, and laborers involved in the project.

Commercial Surety Bonds

Commercial surety bonds are bonds that guarantee the compliance of a business or an individual with various laws, regulations, or contractual obligations. Some examples of commercial surety bonds are:

  • License and permit bonds
    • These bonds ensure that a business or a professional obtains and maintains the required license or permit to operate legally in a certain jurisdiction.
  • Public official bonds
    • These bonds ensure that a public official, such as a judge, a notary, or a treasurer, performs their duties faithfully and honestly.
  • Tax bonds
    • These bonds ensure that a business or an individual pays the taxes owed to the government, such as sales tax, fuel tax, or liquor tax.

Court Surety Bonds

Court surety bonds are bonds that guarantee the fulfillment of certain obligations or requirements set forth by the court. Some examples of court surety bonds are:

  • Appeal bonds
    • These bonds ensure that the appellant will pay the court costs and damages if they lose the appeal.
  • Probate bonds
    • These bonds ensure that the executor, administrator, or trustee of an estate will manage the assets and wishes of the deceased faithfully and lawfully.
  • Guardianship bonds 
    • These bonds ensure that the guardian will act in the best interest of the minor or incapacitated person under their care.

Fidelity Surety Bonds

Fidelity surety bonds are insurance policies that protect businesses from losses caused by dishonest or fraudulent acts of their employees. Some examples of fidelity surety bonds are:

  • ERISA bonds
    • These bonds cover retirement plans from losses due to employee theft or fraud.
  • Business services bonds
    • These bonds protect customers’ property or money from theft or damage by the business or its employees while performing services.
  • Employee dishonesty bonds
    • These bonds reimburse businesses for losses resulting from employee dishonesty, such as embezzlement, forgery, or larceny.

Why Are Surety Bonds Required?

Surety bonds are required to protect the public from losses or damages caused by the failure of a business to fulfill its contractual, legal, or financial obligations. They also ensure compliance with various laws and regulations. 

Who Needs a Surety Bond?

Surety bonds are required for businesses or individuals that need to guarantee their performance, compliance, or honesty to their customers, regulators, or partners. Some examples of businesses that need surety bonds are:

  • Contractors who bid or work on public or private projects.
  • Auto dealers, liquor stores, and other licensed businesses.
  • Suppliers, developers, and subcontractors.
  • Notary Public
  • Anyone who needs a title to a vehicle.
  • Peace Officer
  • Plumbers, Roofers, Masons
  • Janitorial
  • Concrete work

How Do Surety Bonds Work?

Surety bonds work as follows:

  1. An obligee (the party requiring a guarantee) hires a principal (the party performing a task or service) and asks for a surety bond to ensure the work will be done according to certain terms.
  2. The principal obtains a surety bond from a surety (the party issuing the bond and guaranteeing the principal’s obligations) by paying a premium and providing information about the project and their financial situation.
  3. The surety evaluates the principal’s ability to perform the task or service and issues the bond, which specifies the amount of coverage, the terms of the contract, and the parties involved.
  4. If the principal fails to meet their obligations, the obligee can file a claim against the bond to recover any losses or damages.
  5. The surety investigates the claim and pays the obligee up to the bond amount if the claim is valid.
  6. The principal is responsible for reimbursing the surety for any claims paid, plus any fees or expenses incurred by the surety.

The Benefits of Surety Bonds

Surety bonds are a type of contract that guarantee the performance, payment, or compliance of one party to another. Some of the advantages of using surety bonds are:

  • They provide increased credibility for the principal, as they demonstrate their ability and willingness to fulfill their obligations.
  • They offer financial protection for the obligee, as they can recover any losses or damages caused by the principal’s failure or default.
  • They enable risk mitigation for the surety, as they can assess the principal’s qualifications, financial stability, and reputation before issuing the bond.
  • They foster better performance for the project, as they ensure that the principal follows the terms and specifications of the contract.
  • They support legal compliance for the industry, as they ensure that the principal adheres to the local, state, or federal laws and regulations pertaining to their license or permit.

How to Get a Surety Bond

Purchasing your surety bond with TMD is fast, easy and secure. Most of the bonds can be purchased directly from our website within minutes. Simply select the correct bond, enter the information requested, and pay for your bond. Your bond will then be emailed to you directly.


Other bonds require a little bit more information for underwriting purposes. You will submit your information online and upload supporting documentation if applicable. We will review for approval, send you an invoice, and once paid the bond will be delivered via email and mail if required.

Where to Get a Surety Bond

You can purchase a surety bond from any insurance or bonding company that sells surety bonds.

TMD Surety Bonds is a great option for obtaining a surety bond, especially if you’re located in Texas.

Here’s why:

  • Experience
    • TMD Surety Bonds is a family-owned and operated Texas surety bond agency with over 30 years of combined experience in the surety industry.
  • Specialization
    • We specialize in all types of surety bonds, including title bonds, dealer bonds, notary bonds, freight broker bonds, bid bonds, performance bonds, construction bonds, liquor bonds, and more.
  • Convenience
    • We are conveniently located two doors down from the Fort Worth DMV in Texas.
  • Affordability
    • We offer bonded titles as low as $100.00, license and permit bonds as low as $100.00, and motor vehicle dealer bonds as low as $225.00.
  • Quick Turnaround
    • We provide a quick and secure online application process with a fast turnaround time.
  • High Ratings
    • We have a high customer rating of 5.0 with over 700 Google reviews.

Remember to always check the requirements of the obligee and ensure that the surety company is licensed to do business in your state.

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How Much Does a Surety Bond Cost?

Surety bond costs can vary depending on the type of bond and the personal credit report of the applicant. Here are some general cost ranges for top bond types with TMD Surety Bonds:

Bond Type
Cost
Title Bond (Bonded Title)
Starts at $100 for bonds less than $6,699
Motor Vehicle Dealer Bond
Starts as low as $225
Notary Bond
$50 for the full 4-year required term
License & Permit Bonds
Starts as low as $100

Please note that these are general cost ranges and the actual cost may vary based on various factors. It’s always best to contact TMD Surety Bonds directly for the most accurate quote.

Surety Bond vs Insurance: What’s the Difference?

Surety bonds and insurance are both financial tools used for risk management, but they function differently:

  1. Parties Involved
    1. Insurance is a two-party contract between the insurer and the insured. A surety bond is a three-party agreement involving the principal (the party required to get the bond), the obligee (the party requiring the bond), and the surety (the company issuing the bond).
  2. Purpose 
    1. Insurance protects the policyholder from financial loss due to negligent acts or disasters. A surety bond guarantees that the principal will fulfill their contractual obligations.
  3. Claims
    1. In insurance, the company compensates the insured for covered losses. In surety bonds, if the principal fails to meet their obligations, the surety compensates the obligee and then seeks reimbursement from the principal.
  4. Protection
    1. Insurance protects the policyholder from financial loss. Surety bonds protect the obligee by ensuring the principal fulfills their obligations.

In summary, insurance is designed to protect the policyholder, while surety bonds are designed to protect the obligee and ensure contractual obligations are met.

Tips for Choosing a Reliable Surety Bond Company

Choosing a reliable surety bond company is crucial for your business. Here are some tips to help you select a reputable and trustworthy provider:

  1. Research and Reputation
    1. Start by researching the provider’s background, exploring their history, and confirming their standing in the industry. Look for signs of reliability, integrity, and consistent performance.
  2. Online Reviews
    1. Consult online reviews and seek recommendations from industry peers.
      Licensing and
  3. Credentials
    1. Verify that the provider is fully licensed and authorized to issue surety bonds in your specific state or jurisdiction.
  4. Bond Expertise
    1. Choose a provider with expertise in your specific bond type.
  5. Financial Stability
    1. Ensure the company’s financial stability.
  6. Better Business Bureau
    1. Check with the Better Business Bureau to see if the company has any complaints filed against it.
  7. Coverage Amounts
    1. Check out the bond coverage amounts they offer.

 

Remember, the right surety bond provider can make a significant difference in the success of your business operations.

Surety Bond FAQs

Yes, most surety bonds do expire. The expiration date depends on the bond type and the terms of the bond. However, some bonds are continuous and remain in force until canceled.

Yes, a surety bond can be canceled under certain conditions, such as when the obligee provides a written release stating that the bond can be canceled. However, some bonds, like court bonds, cannot be canceled by the principal or the surety.

Yes, it’s possible to get a surety bond with bad credit, but the premiums may be higher. Some surety bond providers specialize in helping people with poor credit get the bonds they need.

The process of getting a surety bond is typically quick. It can be done instantly or within a few business hours for simple bonds, but for more complicated bonds, it could take 1 to 2 business days.

To avoid surety bond claims, it’s important to understand your obligations under the bond, follow all applicable laws and regulations, and resolve any disputes with customers. Regular checks with your agent or broker and submitting periodic reports can also help.