Surety Bonds 101
by Alison Neumann

Surety Bonds 101

When I tell my friends and family that I work in the commercial side of insurance, and issue many surety bonds, I get a lot of blank stares.  The fact is, if you’re not familiar with construction and the world of bonding, it’s likely you’re not aware that surety bonding even exists!  Below I’ve a compiled a few quick tips and facts to help with familiarity and awareness of surety bonding.

  • In its purest form, a surety bond is a financial guarantee that a contract will be upheld and completed for an owner by the contractor or principal. In construction projects, owners often require their contractors to be bonded, both when bidding and when awarding a job.  That means that a surety company has to vet and approve contractors in order to financially back and guarantee that the contractors will perform as promised.
  • Surety bonding is not insurance. In fact, a bond doesn’t protect the party who purchases it.  Much like how a bank loan is borrowed to purchase property, where the bank expects the borrower to keep up on payments, a bond is a guarantee of completion of a promise to the owner of a project.  If a contractor defaults and does not complete a job, the surety company will step in and hire another contractor to finish it.  Then the surety company will go back to the bonded contractor for its loss to recover damages.  Insurance carriers expect and plan for a certain amount of losses through premium costs, while surety companies actively seek reimbursements for any loss.
  • Not all insurance carriers work in the world of surety bonding, and the same goes for insurance agencies. It takes a special know-how to find the right carrier for the right client who has both acceptable financial scores and profits to make a good fit.
  • There are two main types of surety bonds: construction and commercial bonds. Construction bonds are typically for large projects, which can be either private, public, or government ordered.  Commercial bonds are often smaller and cover a wide variety of jobs, the most common being Notary Bonds, ERISA Bonds, License and Permit Bonds, Lost Title Bonds, and Public Official Bonds.  Construction bonds are most often purchased by a business, while commercial bonds can be purchased by a single person or a business.  A third common type of surety bonds are fiduciary bonds, or court bonds, which are encountered in probate court.

If you find yourself in need of a surety bond, VAST specializes in this area.  VAST handles a wide variety of surety bonds and has a large selection of carriers we work with who write bonds.  For more information on surety bonding, contact your insurance agent today.

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