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What is a surety bond?A surety bond is contract among three parties.  The Obligee is considered the “beneficiary” to the bond, the Principal is the individual or entity required to perform a particular contract or obligation and the Surety is an individual or entity who undertakes an obligation to pay a sum of money or to perform a duty or promise on behalf of another individual or entity in the event that person fails to act or defaults on their duty or contractual obligations.  There are thousands of surety bond requirements nationwide however, they are generally classified as contact bonds, subdivision bonds, license bonds, permit bonds, miscellaneous bonds and court bonds.


How do I obtain a surety bond?

Bonds are issued through surety agents/broker also known as “producers.”  These agents are typically appointed with several surety bond carriers.  This is important as most surety bond specializing agents have knowledge of bond requirements and can align specific requests or bond programs with the most suitable market.


Why are surety bonds required?

Surety bonds are required for various reasons.  The Miller Act of 1932 mandates bonding on all Federal construction projects above a certain monetary value.  Most States have adopted “Little Miller Act” statutes on projects funded by City, County, State or other municipalities.  With regard to public works contracts, performance and payment bonds serve as protection against contractor default.  They ensure the project will be completed according to the contract terms and conditions as well as guarantee payment to all subcontractors and suppliers on the job.  Other license and permit bonds are mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond ensures that the Principal will comply with all regulations and licensing requirements.   Court and miscellaneous bonds are required to ensure the ethical performance of a fiduciary responsibility.  Should the Principal be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.  Surety bonds are required in certain judicial matters from a party to a lawsuit to paylosses which may arise from the delay or depravation caused by the legal proceeding should they not prevail in the matter.


What is the cost of a surety bond?

Premiums charged for surety bonds vary based on a number of factors.  They are assessed in conjunction with the Carrier’s rate filings on a State by State basis, as well as in consideration of the type of bond, bond amount, personal credit and/or the financial strength of an applicant.  Generally, the cost of a surety bond is a percentage of the penal sum of the bond.  Often bond premiums are calculated as a dollar amount per thousand.


What is the difference between a surety bond and insurance?

The main difference between a surety bond and insurance is that a surety bond does not provide protection for the party purchasing the bond.  A surety bond transfer’s risk to a third party where insurance is a two party risk transfer mechanism.  Unlike insurance, bonds are underwritten with no expectation for a loss.  Should a loss be incurred by a bonding company, repayment by the Principal is expected.


What is indemnity?

Indemnification is protection, security and/or a promise to pay the cost of damage, loss or injury.  With regard to obtaining surety bonds, an indemnity agreement, also referred to as a general indemnity agreement or GIA, is a formal document/contract between a principal to a bond (insured) and the bonding company or carrier.  The indemnity agreement obligates the named indemnitors to protect the surety company from any loss or expense the surety sustains as a result of having issued bonds on behalf of the bond principal.  If the principal fails to fulfill its bonded obligation and the surety suffers a loss, the indemnitors are legally bound to indemnify/repay the surety for its losses.


Why does my spouse have to sign the indemnity agreement if she has no ownership or involvement in the company?

In most cases, bonding companies require spousal indemnity based on personal assets being shared between spouses.  Should a loss be incurred by a bonding company, they will act to perfect their indemnity position for reimbursement.  Based on community property, spousal indemnity ensures assets are not transferred to a spouse as a means of avoiding repayment of a loss to the bonding company.


How do I qualify for a surety bond?

The underwriting process for a surety bond varies based on the type of bond needed and the bond amount.  Some bonds simply require the collection of basic information needed to execute the bond.  Other surety bonds require a credit check of the individual or owner of the business and other bonds or bond programs may require the need for financial disclosure.  Relative to a contractor obtaining bid, performance and payment bonds, most bonding companies offer a limited program which qualifies them for bonds solely based on the business owner’s personal credit.  Larger single job and aggregate bonding capabilities require more in depth information from the contractor.  Generally, a questionnaire which provides an overview of the contractor’s business operations, references, banking and other information useful to underwriting would be required in addition to financial statements for the company and owners, a schedule of work-in-progress and bank line of credit details.


How is my bond premium being calculated?

Premiums charged for surety bonds vary based on a number of factors.  Often, bond premiums are calculated as a dollar amount per thousand.  They are assessed based on the Carrier’s rate filings on a State by State basis, as well as in consideration of the type of bond, bond amount, personal credit and/or the financial strength of the applicant.  Generally, the cost of a surety bond is equivalent to a percentage of the penal sum of the bond.  In many cases, the bond premium is not assessed on a flat percentage.  Some premium rates are tiered where the premium percentage decreases as the bond amount increases.


Will I be declined to purchase a bond based on my credit?

The personal credit of a bond applicant may be considered during the underwriting process depending on the type of bond and bond amount.  Personal credit is often considered an important part of the underwriting process.  As a result, a bond may be declined for those applicants who do not meet the bonding company’s minimum credit score model.  Items such as a prior bankruptcy, liens and/or judgments are highly unfavorable to the underwriting process.


How long will it take to become bonded?

The approval process will vary based on the type of bond required, the bond amount or the size of bond program needed.  Most license, permit, miscellaneous and court bonds can be underwriting in 24 to 48 hours.  Larger bonds or programs take longer to underwrite and can only be determined on a case by case basis.


What is fund control?

With regard to construction projects, funds control, also known as funds disbursement or funds administration, is utilized as a means of overseeing a contractor’s proceeds on a job.  The fund control company acts as an independent third party to the contractor and surety . Under certain circumstances, bonding companies may require funds control to enhance a contractor’s bond program if they are exceeding their qualified single or aggregate parameters.  Generally, the funds control company will establish an escrow account and requires a letter of directive from the project owner to forward all progress payments from the job to the fund control company for deposit into the escrow account.  The fund control company assists the contractor with obtaining the proper paperwork required by the project owner as well as from all subcontractors and suppliers on the project, inclusive of lien releases.  Once the required paperwork has been collected, the fund control company will disburse payments to all subcontractors and suppliers and forward the balance to the contractor, aside from any required hold back. Funds control is considered a risk mitigating tool in the surety underwriting process.


What is collateral?

By definition, collateral is a property or other asset pledged as security for repayment of a loan, to be forfeited in the event of default or a loss.  With regard to surety bonds, collateral may be required in order to qualify for a particular bond or bond program.  The most common forms of collateral taken in the surety industry are cash, irrevocable letters of credit and real estate equity.  Collateral is sometimes taken by a bonding company when an applicant does not meet their underwriting guidelines for a particular bond or bonding program.


What do I do once I have the bond?

Commonly, the original, wet-signature, surety bond must be filed with the entity requiring the bond (the Obligee).  In some cases, the original bond is retained by the entity required to post the bond (the Principal).


How do I determine if the bonding company is reputable?

Knowing if a bonding company is Treasury Listed is useful.  The T-list reflects all surety companies approved to write bonds to federal entities.  Note, some City, County, State or other municipalities will accept surety bonds from a company who is not T-listed.  You can access the Treasury List as follows:  Another useful reference is a bonding company’s A.M. Best Rating.  An A.M. Best financial strength rating is an independent opinion of an insurance carrier’s financial strength, as well as their ability to meet its open insurance policies and contract obligations.  A.M. Best Ratings are independent opinions, based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile, in addition to the credit quality of its obligations.  Many local, City, State and Government municipalities set minimum A.M. Best rating for acceptance of bonds from an insurer.  A link to the A.M. Best search website is


What is an SBA Surety Bond Program/Guarantee?

The U.S. Small Business Administration has a program to assist disadvantaged contractors obtain bid, performance and payment bonds where they have not qualified in the standard bond marketplace.  The SBA does not issue surety bonds, they share the risk or liability with a bonding company.  In most cases, the SBA assumes 80% of the bond liability.  In other cases, they may guarantee 90% however, they are generally related to contractors who have obtained a Disabled Veteran Business Enterprise (DVBE) designation.  For additional details please visit