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What Is A Surety Bond?

A Surety bond is a legally binding contract that ensures obligations will be met between three parties, the principal (whoever needs the bond), the oblige (the one requiring the bond) and the surety (the insurance company guaranteeing the principal can fulfill the obligation).

How Does a Surety Bond Work?

Surety bonds work as a form of insurance. If the bond’s requirements are not met, such as not performing contracted work or failing to pay vendors, a claim may be filed against the bond. Think of a surety bond as a form of credit to the principal. Whether claims are made by the public or the obligee, they must be repaid by the principal to the surety.

How is Surety Bond Pricing Calculated?

Surety bond pricing is based on a percentage of the full bond amount being required (called the premium), which is usually anywhere between 1-10%.

The premium is based on your financial strength, e.g. personal credit. Other items such as your business/personal financials, and industry experience may be analyzed as well.

However, the type of bond that you need can also drastically affect bond costs as well. For example, some obligees (the ones requiring the bond) require higher bond amounts in certain industries, or for varying purposes.

For instance, freight brokers must obtain a $75,000 surety bond in order to obtain and keep their broker license. Generally speaking, the higher the bond amount that is required, the higher the cost will be since the cost of the bond is calculated using the bond amount. On the contrary, a contractor license bond required by a local municipality is usually a smaller amount (e.g. $10,000), which means you would have to pay a lower price. Click below to learn more about bonds and get a quote within minutes.