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

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 types 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.

Do All Types of Surety Bonds Work the Same?

Yes and no. It would be inaccurate to say that bonds of all types work exactly the same way. As we will illustrate throughout this piece, surety bonds agreements apply to anything and everything. And each different type of surety bond is unique. Nevertheless, even if the details differ, the basic process works like this for almost all types of surety bonds:

  • A party (the principal) is required to get a surety bond that meets certain conditions, especially in terms of coverage amounts.
  • If the principal does something unlawful or unethical, or violates the terms of a contract, he or she can be held financially liable under the surety bond agreement.
  • The victim of the misconduct (the obligee) – whether an individual, company, or government agency – will file a claim against the bond seeking compensation equal to the damages caused.
  • The surety that issued the bond will investigate the claim to verify whether or not the accusations are true.
  • Invalid claims receive an immediate denial. Conversely, the surety guarantees speedy payment in full for all valid claims.
  • After paying the claimant, the surety redirects their focus to collecting the amount of the settlement, plus interest and fees, from the principal with the bond..
  • If the debt to the surety is not repaid it can enter collections. If it is repaid, the claims process concludes.

There may be some variation to this series of steps depending on the particular type of surety bond. Viking Bond Service can help you make sense of any surety bond requirements you must meet. Contact us for free information from a team of experts.

Common Contract Bond Types:

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 they are constructing a building. If the contractor fails to complete the job 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 are generally issued along with Performance Bonds to guarantee payment to subcontractors 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 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, 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 insurance covers policyholders for losses that happen as a result of fraudulent acts or theft by the principal's employees. There are many types of Fidelity Bonds available to different types of businesses.

The Different Types of Fidelity Bonds

The two main types of coverage are first party and third party. First-party coverage protects your business against theft or other crimes committed by your employees. Third-party coverage protects your customers in the event one of your employees commits theft and a customer loses their property, funds, or other valuables and assets. Third-party coverage is often used if you, as the principal, have workers who often have to be onsite at your customers' properties.

There are three types of fidelity bonds that are designed to protect your business

  • Business service bonds protect your clients from theft or loss of valuables and assets. This type of surety bond can help you stand out from your competitors in your industry since many businesses don't carry this insurance.
  • Employee dishonesty bonds protect your business from fraudulent activities, theft, etc. committed by your employees. If their negligent or intentional actions cause your business to lose money or property, or any other assets, the Employee dishonesty bonds will help cover the losses.
  • ERISA bonds (Employee Retirement Income Security Act of 1974) provide protections for those employees with pension plans in the private industries. ERISA bonds set a minimum standard for pension plans for your employees and their beneficiaries. Additionally, they guarantee the payment of benefits to employees, including pensions, 401(k)s, etc.

Why Are There So Many Types of Surety Bonds?

Many types of bonds exist to protect the public from businesses that might engage in unethical or illegal behavior. In industries where having a bond is required to get a business license, regulators report a high risk of misbehavior. This is not because these industries are associated with criminality; it's simply because they involve major business transactions, as in the case of an auto sale or a private school enrollment.

Depending on the industry, the types of claims that can be filed against a bond will differ. This is why 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 extra 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 bond types:

  • The obligee is the state agency that requires your business to have a certain type of 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. A business owner may need to provide some basic personal and financial information. They will be approved 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 of it 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. Initially, the cost is paid to obtain the bond, then again every year. Viking Bond Service can reassess 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.

Can You Get Different Types of Surety Bonds With Bad Credit?

Lower credit scores or a history of financial difficulty (e.g., bankruptcy or unpaid bills) can make it challenging to get a bond. Some surety agencies deny people outright because of bad credit. Viking Bond Service is different. We cannot guarantee a bond. However, we do everything possible to get bonds for everyone who contacts us.

Viking Bond Service is eager to help everyone obtain whatever types of surety bonds they need. That's why we created a special bad credit surety bond program to make the process easier and more accessible. If you have bad credit or have been denied elsewhere, take advantage of what our team can offer.

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 their credit history – get the legally required surety bonds they need to begin building a successful business.

Request a Surety Bond Quote:

No matter what type of surety bond you need, how soon you need a bond, or where you're located, Viking Bond Service is ready to help. Request a quote at your convenience, and you can expect to get a number back within 24 hours in most cases. For more information about our services, contact us by phone at 1-888-2-SURETY (1-888-278-7389) or by email, and our bond experts can answer your questions.

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