What is a Surety Bond?

Posted February 11th, 2019 by Jason Metz

A surety bond protects your customers. It guarantees that you will perform the tasks and obligations of your job. The specifics of this guarantee depend on the type of surety bond.

A surety bond is an agreement between three parties:

  • Your business.
  • Your customer.
  • A surety company (also known as a guarantor).

Here's how a typical performance surety bond works:

You pay the surety company to take out a bond. If you fail to meet the obligations of the job and do not resolve it with the customer, the customer could file a claim with the surety company. If the surety company sides with the customer, it would then compensate the customer and you would be responsible for paying back the surety company.

For example, if a car dealer sells you a stolen vehicle, you could make a claim against their surety bond. They must then repay the surety company.

Types of surety bonds

The kind of surety bond you might need depends on the type of job you're doing. For example, a house cleaner might need a different type of bond than a general contractor who's competing for a construction job. Below are some common types of surety bonds for small businesses:

  • Ancillary bond – These are bonds for work that is "incidental and essential" to the performance of a contract. A common example is a maintenance bond, which guarantees you will correct certain issues like workmanship or material defects within a certain time period of completing a contract.
  • Bid bond – If you are the successful bidder on a job, this guarantees you will enter into a contract and perform the job requirements.
  • License and permit bond – This guarantees you will comply with codes and regulations put in place by a town, city or state. This type of bond is common among contractors, electricians and plumbers.
  • Payment bond – This guarantees you will pay your subcontractors and labor/material suppliers for their work on a contract.
  • Performance bond – This guarantees you will perform within the terms and conditions of the contract.

Some clients might require a surety bond before you begin work. This might depend on the type of business you run, the client's hiring preferences and government codes and regulations. For example, an office complex might want the protection of a performance bond before hiring a cleaning service. Or an apartment complex might need an electrician to have a license and permit bond in place.

How much does a surety bond cost?

A surety bond cost will depend on several factors, but you expect to pay around 1% to 3% of the total project cost, according to Trusted Choice, a group for independent agents. Other cost factors can include:

  • The business's credit score.
  • The type of bond.
  • Your work history (for example, if you don't have a lot of documented experience for a certain type of project, a surety company could see this as a higher risk).

Surety bond companies

Generally, to get a surety bond you need to apply with an insurance or bonding company. Your business may be eligible through a program with the U.S. Small Business Administration that guarantees surety bonds from authorized surety companies, including ancillary, bid, payment and performance bonds.

Top 25 surety insurance companies

1 Travelers Insurance Group
2 Liberty Mutual Group Inc.
3 Zurich American Insurance Co.
4 Western Surety Co.
5 Tokio Marine
6 Chubb Corp.
7 Hartford Fire Insurance
8 IAT Insurance Group Inc.
9 ACE Westchester
10 Swiss Re
11 Sompo
12 Liberty Mutual Agency Corporation
13 Great American Insurance Co.
14 RLI Corp.
15 Philadelphia Insurance Companies
16 Argonaut Insurance Co.
17 Merchants Bonding Company
18 Continental Corp.
19 Arch Capital
19 Arch Insurance Co.
21 HCC Credit & Surety
22 HCC Property & Casualty
23 Berkley Insurance Co.
24 Hanover Insurance Group Inc.
25 SureTec Insurance Co.
Source: S&P Global Market Intelligence. Rankings based on direct premiums written for surety in 2017.