Surety Bonds


If you work in the construction industry or own a contracting company, you might have encountered the term “surety bond.” While it is similar to business insurance, it serves a distinct purpose, primarily providing protection to the client rather than the business itself. If you are bidding or working on a large project you may be requested to provide surety bonds.

Surety bonds are not technically insurance but do provide protection like insurance. Surety is an agreement between two parties that provides protection for the obligee or client, not the “insured” or principal.

Contact us today for your Surety Bond needs
PHONE # 419-423-9145.

Understanding How Surety Bonds Work

A surety bond involves three parties:

  • the principal (the business owner or contractor)
  • the obligee (the client or project owner)
  • the surety (the bonding company).

Essentially, a surety bond serves as a guarantee that a specific project will be completed as per the contract. It ensures the client that the contractor or subcontractor will fulfill their obligations effectively and provides a safety net for the client in case the principal cannot meet the contractual terms, leading to a “default.”

In the event of a default, the surety intervenes, triggering the “Performance” bond to ensure the completion of the work. Subsequently, a “Labor and Material Payment” bond pays subcontractors who contributed to the project. Unlike insurance, once the surety bonds cover the costs, the principal is responsible for repaying the entire bond amount to the surety provider.

Types of Surety Bonds

Within the construction and contracting realm, several types of surety bonds exist, each serving different purposes:

Bid Bonds

Guaranteeing that a contractor is genuinely interested in and capable of undertaking a project. In case the contractor wins the bid but fails to execute the work, the client may make a claim on the bid bond.

Supply Bonds

Ensuring that supplying companies are accountable for providing the necessary materials and equipment for a job. The bond covers the purchaser’s loss if the company fails to deliver.

Maintenance Bonds

Guarantee the quality of workmanship for a certain period after the job’s completion.

Performance Bonds

Replacing bid bonds after a job is awarded. If the contractor does not fulfill the contract terms, the project owner can make a claim.

Payment Bonds

Also known as “Labor and Material Payment” bonds, they provide financial security for subcontractors and suppliers if the main contractor cannot pay them for their work.

The Importance of Surety Bonds

There are two primary reasons why surety bonds are vital in the construction industry:

Client Security: Surety bonds act as a type of insurance, but specifically for the client, assuring them that the work will be completed, regardless of any obstacles. However, they do not replace general business insurance, which is essential for covering other potential risks.

Client Requirements: Many clients require contractors to have surety bonds as part of the agreement, ensuring that the contractor is committed to fulfilling the project’s terms.

How do you obtain a Surety Bond? 

The process of securing a surety bond can vary depending on the bonding company and the type of bond required. There are two common options:

The process of securing a surety bond can vary depending on the bonding company and the type of bond required. There are two common options:

  • Rapid Bond Application
    A quick and straightforward process suitable for contractors or businesses with a shorter operating history. It is typically used for smaller construction projects.
  • Traditional Bonding & Underwriting
    A more extensive process involving detailed underwriting, particularly for larger contractors and more complex projects.

Understanding the Costs of Surety Bonds

The cost of surety bonds depends on factors such as the type of bond, coverage amount, project experience, business credit history, and financial stability. On average, surety bonds may cost between 1-3% of the total bond amount. For example, a $75,000 bond may cost between $750 and $2,500.

If you’re interested in obtaining a surety bond, you can contact a Hitchings Insurance specialist and request a quote based on your specific requirements. You’ll receive the necessary bond following approval and payment of the initial premium.

The Final thought on Surety Bonds

Surety bonds are crucial in providing peace of mind to clients and ensuring the successful completion of construction projects. By understanding how surety bonds work and their various types, contractors can meet client requirements and build strong partnerships in the construction industry.

While we focus on the construction industry, there are literally thousands of bond use cases- anything from ERISA or pension plan bonds to bankers blanket bonds, and all sorts of probate bonds are commonly purchased by clients.

To learn more about our ‘people before policies’ commercial insurance mindset – complete and submit a free quote request – or call us at 419-423-9145.