Surety bonds act as a contract between a business, a client, and an insurance company. They guarantee the surety company will reimburse the client if the business fails to deliver contracted services.
Larger clients and government agencies often require proof of a surety bond before they'll work with your business. State laws also mandate bonds for certain professions.
Even the most reliable business could suddenly lose a valuable employee, or run out of needed materials due to a supply chain disruption. Surety bonds provide a guarantee that your client won't lose money if your business unexpectedly can't fulfill its obligations. It's a key part of risk management when small businesses take on big projects.
Even when it’s not required, a commercial surety bond is a way to prove your small business is reliable. It may give you an edge over non-bonded competitors, which could mean the difference between winning or losing a project.
A surety bond guarantees that your client will receive financial reimbursement in the event your business fails to complete a project or fulfill the terms of a contract. They also help small businesses obtain necessary licenses and permits.
Specifically, surety bonds often provide coverage for:
If a commercial builder takes on a large construction project, but supply chain issues delay some of the parts they've ordered, they may not be able to finish the project by the agreed upon deadline.
If an inspection reveals that wiring installed in a home by an electrician isn't up to code, a surety bond can reimburse the property owner for the cost of hiring another contractor to do the rewiring.
Some professionals may need license or permit bonds to comply with state licensing laws or to get a permit for a certain type of work. For example, state laws require general contractors in California to carry a $25,000 surety bond (also called a contractor license bond), while Illinois cannabis dispensaries must have a $50,000 surety bond for each business location.
Surety bonds protect professionals in many different industries, and there are different types of bonds for the unique risks they face. You may need a bond to bid on a project, get a license, or obtain a work permit, depending on your industry and the type of work you do.
Here are a few examples of the top professions that rely on surety bonds or are required to carry them.
Construction companies and contractors typically need construction bonds and insurance, and in some locations, general contractors must carry a bond to obtain a license. The amount of the bond is specified by state law or the client.
The construction industry has several types of surety bonds, such as:
Business owners who provide professional services often need a bond in order to sign a contract with a client or comply with state requirements for their profession. For example, state laws usually require notary bonds that protect the public from potential errors made by a notary public.
Some states require anyone who prepares income tax returns for someone else to obtain a tax preparer bond. Tax bonds are another type of surety bond that some state and local governments require for commercial taxpayers that serve as a financial guarantee that they will act in the best interests of their clients.
While a surety bond protects your clients from financial loss, it does not protect your own business against damages or losses. In fact, your business is responsible for paying back any amount paid by a bond to a client.
That's why you also need small business insurance. For instance, a surety bond does not include coverage for:
Though a surety bond will cover theft of client property, it won't provide coverage for property damage. Look to your general liability insurance policy for financial protection against accidental damage to a client's property.
General liability insurance also provides financial protection against accidental injuries, such as a client who slips and suffers an injury at your office. You may need this policy to fulfill the terms of a lease, loan, or contract.
While surety bonds protect your customers against a financial loss, you'll need to protect your own business against risk. These policies are often purchased by small business owners:
General liability insurance: This policy covers expenses related to client injuries and property damage, such as a slip-and-fall injury at your business.
Workers’ compensation insurance: This policy covers medical bills and disability benefits from work-related injuries and illnesses. Most states require technology businesses with employees to purchase workers’ compensation.
Commercial auto insurance: This policy is required in most states for business-owned vehicles. It can cover property damage and medical bills in an accident involving your IT company's vehicle, along with theft, vandalism, and weather damage.
Review answers for the frequently asked questions about surety bonds.
Surety bonds do not work like standard small business insurance policies, which pay out claims to the policyholder. Instead, surety bond claims are paid to the client (also called the obligee). For example, if your small business fails to complete a construction project, the surety company will reimburse your client.
Unlike an insurance policy, you must pay this amount back to the insurer or surety bond company. In a way, a surety bond is more like a line of credit than insurance.
A surety bond offers a financial guarantee that an insurance company will reimburse your client if your business doesn’t complete a project, breaks the terms of a contract, or fails to adhere to regulations.
When you first start working with a client, they may ask you to purchase a surety bond in a specific amount before they'll allow workers on their premises. State laws often have surety bond requirements before you can get a license or work legally in a certain profession.
For example, you may need a surety bond to sign a construction contract, or work for your local government on a project.
Surety bonds protect your clients from financial loss, which means they may be willing to work with your company even if your business is relatively new. They can rest assured you'll meet contractual obligations, or reimburse them fully if the bond requirements are not met.
You'll want to research the laws in your state to make sure you're carrying all the necessary bonds and insurance for your profession. You can also consult with an insurance agent who can help you find the right coverage.
It's easy to get a surety bond and business insurance with Insureon.
First, fill out our free online application to get quotes for general liability insurance, workers' compensation insurance, and other policies. Then, chat with an agent if you'd like to add a surety bond to your coverage.
We'll help make sure you get the right coverage, without paying too much for insurance and bonds.
A surety bond is a financial guarantee that a contract will be completed. A fiduciary bond, also known as a court bond, probate bond, or estate bond, is a type of surety bond used in financial and legal situations.
Government entities, such as probate courts, often require anyone performing a fiduciary role to have a fiduciary bond. A fiduciary role refers to someone managing the property and assets of someone else, such as a financial advisor, guardian, or someone overseeing the execution of a will.
Yes, an indemnity bond is a type of surety bond that ensures that a party receiving funds from another will be paid according to a contractual agreement. Indemnity bonds are commonly used in commercial contracts, leases, and other licensing or loan agreements.