SURETY BONDS: What is Surety Bonds(+US Practices)

Surety Bonds
Image Credit: Old Republic Surety Company

It can be challenging to determine which type of bond you need. However, you can make do with this article as your guide for a surety bond. To begin, let’s establish what a surety bond is. This text will also discuss how to obtain surety bonds in Texas and Florida, as well as insurance surety bonds.

What Is Surety Bonds?

A surety bond is a binding contract between three different parties. This includes the principal (the one who needs the bond), the surety (the company who writes the bond), and the obligee (the department demanding the bond).

However, in finance, it involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults.

surety bond
Image Credit: Olan Group LLC( Surety Bond)

How It Works?

Surety bonds involve a huge amount of money. It guarantees that specific tasks are met. To achieve this, three parties will need to come together with a mutually and legally binding contract. The three parties include:

  • The Principal – the individual or business purchasing the bond.
  • Obligee – the entity that requires the bond
  • The Surety – this is an insurance company or financial institution backing the bond

However, the obligee can make a claim to recover losses if the principal fails to fulfil the contract. Then, once they confirm the claim, the insurance company will pay compensation not exceeding the bond amount. Finally, the insurance company will then expect the principal to repay them.

Types of Surety Bonds

#1. Contract Bond

A contract surety bond is often used to ensure the performance of a principal, for a construction contract. The contract surety bond protects the obligee. Here are few types of contract bonds:

Read Also: What Is INCOME BOND: Definition and Benefits

  • Bid Bond: This is a type of construction bond that protects the owner or developer in a construction bidding process. It is a guarantee that the bidder provides to the project owner ensuring that if you fail to honour the bid terms, the owner will be repaid.
  • Performance Bond: A performance bond protects an obligee when a contractor is unable to complete a project as demanded. Thus, these bonds are usually connected with bid bonds.
  • Payment Bond: Payment bonds guarantee that the contractor will pay its subcontractors, labourers and material suppliers as specified in the contract.

#2. Commercial

Commercial surety bonds are required by governmental entities to protect public interests. These bonds are typically used by licensed businesses to ensure they conform to all regulations and codes as they relate to the well-being of the general public. Typical principals include licensed contractors, automobile dealers, lottery-ticket sellers, liquor stores, notaries and licensed professionals. The types of commercial bonds are:


  • License and Permit Bonds: These are needed by government agencies when professionals apply for a license. Thus, some common principals include plumbers, electricians and contractors.
  • Mortgage Broker Bond: This type of bond protects borrowers from errors taken by mortgage brokers and guarantees that mortgage brokers follow the state regulations.

#3 . Court Bond

This is a general term for all surety bonds when taking an action through a court of law. It is an umbrella term encompassing a range of distinct bond types for various court proceedings.

  • Cost Bond: It guarantees payment of court costs during appeals.
  • Administrator Bond: This type of bond protects an appointed estate administrator when the owner dies without a will.
  • Attachment Bond: The courts need to have these before they take a person’s property. It guarantees that defendants will be paid for any damages resulting from the takeover.

How much do surety bonds cost?

Typically, premiums for surety bonds run between 0.5% and 3% of the overall contract value.

What is the cost of a surety bond in Michigan?

The minimum title bond cost in Michigan is $100. The actual cost will vary based on the type of vehicle and the amount of the surety bond required by the Vehicle Title Division of the Michigan Secretary of State. Bond sums up to $6,000 are available for $100.

Is suretyship equivalent to bonding?

A bond protects a third party (the obligee) from loss risk, but not the purchaser of the bond (the principal). The surety prequalifies a prospective principal based on the principal’s creditworthiness, performance capacity, and moral standing.

Surety Bonds in Texas

Texas is one of America’s best places to carry on business activities. To operate a successful business in Texas, business owners will need to comply with state standards, including relevant license and permit standards issued by state agencies. Such agency includes the Texas Department of Licensing and Regulation.

Moreover, this demands that you submit an appropriate Texas bond when you apply for a business license to guarantee your business’s obligations.

The Texas Surety Bond Process

In Texas the surety bond process works almost same to most other states. Below are key steps:

  1. Firstly, Find a company or a broker that offers that type of bond and apply for a quote.
  2. Determine which type of bond your business needs to apply for.
  3. The surety will perform an underwriting process to determine your ascertain risk level base on your credit score and financial history.
  4. The surety will then send you a quote for a premium. You’ll have the option to either pay the premium or apply for a quote from another surety.

Howbeit, Surety Bonds Direct makes it easier and faster to apply for bonds in Texas. Therefore, it takes just a few minutes to apply for it.

Surety Bonds in Florida

Starting a business in Florida requires obtaining Florida surety bonds. This protects customers and governments by providing a financial guarantee for businesses through relevant laws and ethical standards.

However, you may also need it to get your business license. This can as well help to participate in construction projects as a contractor and in some court cases. Furthermore, whether you’re in construction, insurance, auto sales, or any other industry, Florida surety bonds grant access to some of the largest and different U.S. markets for goods and services.

Insurance Surety Bonds

Surety insurance is a popular but inaccurate term usually to refer to as surety bonds. Surety bonds play an important role in a variety of small to large businesses. It ensures that contractual obligations are properly met. The two are quite different, but they work together to help you build an honest business. In addition, insurance, on the other hand, protects the second party and the company as well as the insured.


Surety bonds provide a level of confidence when choosing a contractor or other service provider. It serves as a form of insurance, providing the client support if the contract terms aren’t met. Finally, They are a means for independent contractors and small businesses to guarantee their achievement under a deal.

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