What is a Surety Bond?

A surety bond is a written commitment between three individual parties which guarantees a contract’s execution as it has been agreed upon. Contractual aspects which are addressed by surety bonds include price, performance and payment agreements. The three parties required for the issuing of a surety bond are:

• The Obligee: Entity that benefits from and requires the bond
• The Principal: Individual, client or business purchasing the bond
• The Surety: Insurance company that issues the bond

Contract Bonds are generally found in the construction industry. These bonds provide a financial guarantee for contracts used in construction including project bids, construction jobs, and goods/service supply agreements. This means that if the terms of a contract are not met then the wronged party can make a claim against a bond.

Commercial Bonds are used to ensure that a business or individual complies with all state regulations and acts honestly. Commercial bonds are commonly needed to secure licenses, used to protect a state from financial loss, or required by a court ruling.

Are Surety Bonds a Type of Insurance?

It is a common misconception that a surety bond is a form of insurance. Surety bonds work like a line of credit for the principal, not an insurance policy. Insurance policies protect the principal by transferring risk and responsibility to the insurance company. The insurer is responsible to pay for losses or damages incurred by the insured and is not reimbursed.

Surety bonds protect the obligee, not the principal, from risk. Any monies paid out by the surety to resolve claims by the obligee must be paid back by the principal to the surety.

What is an Indemnity Agreement?

An indemnity agreement is the legally binding contract that ties you to the surety bond. By signing the indemnity, you agree to pay the surety company back for any monies (including legal fees) paid out to resolve claims that you have caused. If you cannot pay back the surety, your corporate and personal assets can be used for repayment. Indemnities are required, and you cannot purchase a surety bond without signing one.

Why Does My Spouse Have to Sign the Indemnity Agreement?

Legally, you and your spouse share joint assets. In a worst-case scenario, if you are unable to repay monies used to resolve a claim, the surety company will use your corporate and personal assets, including your shared assets, for repayment. For this reason, your spouse is required to sign the indemnity agreement.

Do You Pay for Surety Bonds Monthly?

No. Surety companies require payment in full before they will issue a bond to the principal.

Are Surety Bonds Refundable?

That depends. Most surety companies have a policy that states the first year’s premium is fully earned. What this means is that no matter when you cancel in the first year, you will not be eligible for a refund. Typically, after the first year, anything that is canceled would be eligible for a refund on a prorated basis. Also, certain types of bonds are non-cancellable and would not be eligible for a refund. These include contract, construction and court bonds.