A surety bond involves three parties working together to guarantee you'll complete what you promised to do. To understand how surety bonds work, you must be clear about these:
Surety Bond
A surety bond is a three-party guarantee that ensures you complete your obligations. If you don't, the surety pays the claim, then bills you.
Explore affordable surety bonds below.
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Updated: August 25, 2025
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Key Takeaways
A surety bond involves three parties working together to guarantee you'll complete your promised obligations.
Unlike insurance that protects you from unexpected losses, surety bonds guarantee your performance to others.
Contract bonds ensure project completion while commercial bonds guarantee compliance with laws and regulations.
What is a Surety Bond?
The Three Parties
The Principal (You)
The business or individual who needs the bond. You're responsible for fulfilling the obligation and paying the surety company back if it has to pay a claim.
The Beneficiary
Who you're making the promise to, such as a government agency requiring you to have a license or a client hiring you for a construction project.
The Surety Company
The company that guarantees your performance. It acts as your financial backing, but expects you to fulfill your obligations.
Say you're a contractor bidding on a $100,000 city construction project. The city requires a performance bond to guarantee you'll complete the work as agreed. You apply, the surety company evaluates your creditworthiness and sets your premium, usually a small percentage of the bond amount. You receive your bond certificate once you pay that.
If you abandon the project, the city can file a claim against your bond. After investigating the claim, the surety company pays the city to hire another contractor if it finds it to be valid. However, you must reimburse the surety company for any money they pay out, plus any costs.
Surety Bonds vs. Insurance: A Comparison
People often confuse surety bonds with insurance. Some even search for "bond insurance" without realizing they work completely differently. Insurance protects you from unexpected losses, while surety bonds guarantee you'll fulfill your promises to others.
Purpose | Protects you from unexpected losses | Guarantees your performance to others |
Who it protects | The policyholder (you) | The beneficiary (your client or agency) |
Who pays for claims | Insurance company pays and absorbs the loss | Surety company pays initially, but you repay them |
Liability limits | You choose your policy limits based on needs | Beneficiary dictates the bond amount required |
Claims process | You file claims for your own losses | Others file claims against you for non-performance |
What Does a Surety Bond Guarantee?
Surety bonds guarantee you'll meet specific obligations, but what exactly you're promising depends on the type of bond you need. Two main categories exist: contract bonds and commercial bonds.
Contract Bonds
Performance Bond | You'll finish the project according to contract specifications. | If you abandon a $100,000 city construction project, the surety company hires another contractor and bills you for the cost. |
Payment Bond | You'll pay subcontractors, suppliers, and laborers. | If you don't pay your electrician or concrete supplier, they file claims against your bond to get their money. |
Bid Bond | You'll honor your bid and accept the contract if you win. | It protects project owners when contractors submit lowball bids and then disappear. |
Commercial Bonds
License Bond | You'll operate your business legally and ethically. | Auto dealers, contractors and mortgage brokers need these bonds before getting their licenses. |
Permit Bond | You'll follow permit conditions and regulations. | Cities require these when you build a fence or renovate your storefront. |
Court Bond | You'll fulfill court-ordered obligations. | Estate executors need probate bonds, and losing parties need appeal bonds when challenging court decisions. |
Each bond type has specific guarantee language, but the principle stays the same: if you fail to meet your obligations, the surety company pays the affected party and then bills you to recover the amount. Since bond requirements and amounts vary by state and industry, verify specific requirements with your local regulatory authority before applying.
How are Surety Bond Amounts Determined?
Unlike business insurance, where you can choose your coverage limits, the beneficiary sets the bond amount for you. Government agencies, courts or project owners determine how much coverage they require based on the potential financial risk if you don't meet your obligations.
For license bonds, state regulations specify exact amounts (like $25,000 for auto dealers in Indiana). For construction projects, the bond amount typically equals the full contract value. Courts set bond amounts based on the estate value or lawsuit amount involved.
Surety Bond Meaning: Bottom Line
Think of surety bonds as financial promises that benefit someone else, not yourself. Contract bonds back your construction work, while commercial bonds support your business license applications. Unlike insurance that covers unexpected losses, surety bonds hold you accountable for keeping your commitments. Since bond requirements vary by state and situation, consulting with a licensed surety professional can help you find the right bond for your needs.
What is a Surety Bond: FAQ
We've compiled several frequently asked questions about surety bonds below:
How much does a surety bond cost?
Surety bond premiums are a small percentage of the bond amount. Your credit score affects pricing the most. Excellent credit gets you the lowest rates, while poor credit increases costs. Bond type and business experience also affect your premium.
What happens when someone makes a claim on my surety bond?
The surety company investigates the claim first. It immediately pays the affected party if valid. However, you must repay every penny plus investigation costs. For example, if you abandon a construction project, you'd owe whatever it costs to hire a replacement contractor.
How long does it take to get a surety bond?
License bonds with good credit often get approved within days. Contract bonds requiring financial review take longer because underwriters examine your business finances, project experience and creditworthiness. Your surety company will outline the timeline during your application.
What surety bonds do contractors need?
Contractors need three main types: performance bonds guarantee you'll finish projects, payment bonds ensure you pay subcontractors and suppliers and bid bonds protect project owners from contractors who submit low bids then disappear.
How does a surety bond differ from insurance?
Insurance covers your unexpected losses. If your property floods, insurance pays, and you owe nothing back. Surety bonds guarantee your promises to others. When surety bond claims happen, you must repay the surety company everything they paid out.
Who determines how much my surety bond needs to be?
The beneficiary always sets your bond amount. For business licenses, your state determines the amount, such as how Indiana requires $25,000 for auto dealers. Construction bonds typically equal your full contract value. Courts set bond amounts based on estate values or lawsuit amounts.
Do I need both contract and commercial bonds?
Most businesses only need one type. Construction companies need contract bonds for projects. Other businesses need commercial bonds for licensing. Your industry and business activities determine which category applies to your situation.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.
sources
- Indiana Secretary of State. "Auto Dealer Services Division: Dealer Bond Requirements." Accessed August 23, 2025.