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Surety Bond Types: What Types of Surety Bonds are Available?

There are two main categories of surety bond: Contract Bonds and Commercial Bonds. Contract bonds guarantee a specific contract. Examples include Performance Bonds, Bid Bonds, Supply bonds, Maintenance Bonds and Subdivision Bonds. Commercial Bonds guarantee per the terms of the bond form. A third type of bond sometimes classified as a "policy" that protects against theft is called a Fidelity Bond. Read on to learn more about common types of bonds.

What Are the 4 Types of Surety Bonds?

There are dozens of different types of surety bonds. And since many have different requirements in each state, there are actually hundreds or thousands of different kinds of bonds. Keeping track of all the details can seem daunting. Fortunately, almost every type of surety bond falls into one of four different categories. We will cover each of these categories in depth later in this piece, but here's a quick introduction:

  • Contract Bonds - Contact bonds hold one party in a contractual agreement responsible if they don't meet terms established by another party. This type of surety bond is often required for construction projects, but they can factor into other contractual arrangements. Since contract bonds facilitate the smooth execution of a contract - and hold the wrongful party accountable when things don't go smoothly - they're one of the most common types of surety bonds.
  • Commercial Bonds - Different types of businesses and professionals need a commercial bond before the state recognizes them as a legal business entity. Typically, someone needs to obtain a commercial bond before the state will grant them a license. States use commercial bond requirements to ensure that professionals abide by legal and ethical behavior, and face accountability when they don't.
  • Court Bonds - A judge may require someone to obtain a court bond before allowing legal proceedings to move forward. The court bond holds the bonded party financially liable if they fail to act in a manner required by the court. Court bonds are most common in civil cases.
  • Fidelity Bonds - Fidelity bonds protect a business and its clients if an employee of that business acts unlawfully. Unlike commercial and court bonds, businesses aren't required to get fidelity bonds, but many consider it a prudent way to manage risk. Fidelity bonds also operate like an insurance policy, meaning they pay the bonded party, which differs from other types of surety bonds that hold the bonded party financially liable.

Common Contract Bond Types:

Performance Bonds

A Performance Bond is a surety bond issued by an insurance company to guarantee satisfactory completion of a project by a Contractor. For example, a Contractor may be required to post a Performance Bond in favor of a client for whom the Contractor is constructing a building. If the Contractor fails to construct the building according to the specifications provided in the contract, the client is guaranteed compensation for monetary losses up to the amount of the Bond. The Surety will generally bring in a replacement Contractor to finish the project.

Payment Bonds

Payment Bonds are generally issued along with Performance Bonds to guarantee payment of Sub-Contractors and suppliers in accordance with a specific Bonded project.

Bid Bonds

A Bid Bond guarantees that a Contractor who is awarded a project on which he placed a bid will be able to post a Performance Bond as required and proceed with the project.

Common Commercial Bond Types:

License Bonds

License and Permit Bonds are a general class of surety bond required of a person or entity to obtain a license or a permit in a city, county, or state. These bonds guarantee whatever the underlying state statute, law, municipal ordinance, or regulation requires. Some common examples of License Bonds are:

Auto Dealer Bonds

An Auto Dealer Bond, also called a Motor Vehicle Dealer Bond or MVD Bond, is a type of License Surety Bond. This bond is required of a Motor Vehicle Dealer to obtain their license to buy and sell autos for profit. In some states, Auto Dealer Bonds are also required of businesses that deal in motor vehicle parts, distribution and title, and registration work.

Sales Tax Bonds

A Sales Tax Bond is a form of Financial Guarantee Surety Bond. This means that the Surety would be guaranteeing the principal's sales tax payments to the government. This type of surety bond may be required of any business that collects state sales tax along with payment for sold goods.

Customs Bonds

A Customs Bond is required by the Department of Homeland Security. It is a guarantee to the government that the importer will faithfully abide by all laws and regulations governing the importation of merchandise into the United States.

Court Bonds

A Court Bond is a generic term for many types of surety bonds required by the Judicial system. Examples include:

Fidelity Bonds

A Fidelity Bond is a form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. Typically, the fidelity policy insures a business for losses caused by the dishonest acts of the business's employees. There are many types of Fidelity Bonds available to different types of businesses.

Why Are There So Many Types of Surety Bonds?

Surety bonds exist to protect the public from businesses that might engage in unethical or illegal behavior. In industries where having a bond is a requirement of getting a business license, regulators have said there is a high risk of misbehavior. Not because these industries are associated with criminality; simply because they involve major business transactions, as in the case of an auto sale or a private school enrollment.

The types of claims that could potentially be filed against a bond will differ depending on the industry. Therefore, bond requirements vary widely across both industries and states. There are so many different types of surety bonds to ensure the public is protected while also avoiding putting an oversize burden on new businesses.

How Do You Get Surety Bonds?

The process is simple. Start by reviewing the three parties involved in all types of surety bonds regardless of whether they're contract or commercial:

  • The obligee is the state agency that requires your business to have a surety bond. Typically, this is the same entity that is responsible for granting business licenses in your industry.
  • The principal is you, the business owner. You are the one who obtains the bond initially, renews it as required, and accepts financial responsibility if a claim is filed against the bond.
  • The surety is the company that underwrites the bond. They evaluate and pay claims, then collect that payment from the principal (you).

With most common types of surety bonds, the application process is relatively quick and easy. You and any other business owners may need to supply some basic personal and financial information. Approval is based on credit risk, but applicants with bad credit are often still able to obtain a surety bond. Once you have the bond, you need to provide proof to the relevant state agency through whatever method it prescribes.

How Much Do Surety Bonds Cost?

The final cost depends on the type of bond, the size, and the credit risk of the applicant. Because there are so many variables involved, the cost of bonds can vary widely across applicants, industries, and states.

Although the total amount of bonds is large, the actual cost of the bond is relatively small. Costs are typically in the range of 1-5 percent of the total, so a $30,000 bond could cost less than $1,000. The cost is paid initially to obtain the bond, then again on a regular schedule – generally annually. Viking Bond Service can re-asses the risk of the bond every renewal period which can result in lower surety bond premiums for our clients if credit and/or financial standing has improved.

Apply for Any Type of Surety Bond

Viking Bond Service is your source for all types of surety bonds. Our application process is quick and easy, and our team is committed to getting you approved as quickly as possible. We are equally committed to helping all applicants - regardless of credit - get the legally-required surety bonds they need to begin building a successful business.

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