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March 7, 2023

What is a Surety Bond, and what are the types that are available? 

By Tina Arvizu • ROEHR Insurance, VP Surety & Inclusion

A surety bond is a legally binding contract that secures that all of your obligations as a business owner will be met. In the event that they aren’t, you’ll be covered. Essentially, surety bonds guarantee that the services you promise to provide will be honored and completed. 

A surety bond can be lifesaver for you and your business in the event that you incur losses from a situation like a court case or a dishonest employee. Not only do they provide your business with a layer of protection, but knowing you’re bonded can reassure your customers as well. 

Since you worked hard to build your business, you’ll want to invest in the best ways to protect it – and that includes purchasing surety bonds. In fact, for many types of businesses and certain legal situations, surety bonds are required by law. 

How do surety bonds work? 

A surety bond is a three-party contract between the surety (usually within an insurance company) that promises to be liable for the debt or losses of the second party (the business or company, also considered the principal) to the third party (the client, customer, or court, also called the obligee). 

Essentially, the surety bond guarantees that, should the principal fail to provide agreed on services or other types of obligations within a contract or otherwise agreed on, the surety will pay a set amount to the obligee. 

What are the different types of surety bonds? 

While every state has different bonding requirements, in general, there are three main types of surety bonds. Which is best for you depends on your business and specific needs. 

License and permit bonds 
For some industries, license and permit bonds are required before your business can even begin to operate. Sometimes also called “commercial bonds” or “business bonds,” common types of license and permit bonds include mortgage broker bonds, collection agency bonds and auto dealer bonds. Other types of these bonds include process server bonds and legal document assistant bonds. Below is a breakdown of the three most common license and permit bonds. 

Mortgage broker bonds 
If you are a mortgage broker, you are required to have a mortgage broker bond in order to receive your license. Once you’re bonded, your clients – or borrowers – will be protected financially in the even that you or your company engage in illegal activity. And knowing you are bonded can reassure your clients that you will act honestly and with integrity on their behalf. 

Auto dealer bond 
Auto dealers are required by the Department of Motor Vehicles to be bonded and insured. Whether you’re in the business of buying, selling or trading new or used vehicles, you’ll need to purchase an auto dealer bond before you’re open for business. These bonds protect your customers should you knowingly sell them a lemon, or a stolen car, for example. 

Collection agency bonds
State governments require all collection agencies to hold a collection agency bond. These bonds protect others should you engage in illegal or unethical practices while trying to collect a debt.  

Construction and performance bonds  
If you’re a contactor, it’s important that you’re bonded with the right type of surety bond. This will protect clients in the event that you fail to perform the duties promised. In fact, the surety company can take over the project and pay the judgement if your work is left incomplete or abandoned. 

Below are three common types of construction and performance surety bonds. 

Contractor license bonds 
Before you can obtain a business license as a contractor, you must prove that you are bonded. This applies to an individual who is the single employee or a larger company. 

Plumbing contractor bonds 
In many states, plumbers are required to be bonded. If you’re a plumber operating without a surety bond, you could be liable should you fail to deliver the work you promised or if the materials you chose to use break or are otherwise ineffective. 

Home improvement contractor bonds 
We’ve all heard stories about home improvement contractors who never finish the jobs they start. This is where home improvement contactor bonds are essential, as they protect homeowners should a contractor fail to do their job. This type of surety bond also protects homeowners should the contractor deliver work that is not up to code or doesn’t meet regulations. 

Court bonds 
Court bonds protect people who are in court proceeding as well as consumers from litigation fees. 

Probate bonds 
Also known as “estate bonds” or “fiduciary bonds,” these surety bonds are a requirement if you’re a trustee or executor, as they ensure that you will act ethically and legally when carrying out your duties. The cost of this type of surety bond usually depends on the value of the estate. 

Appeal bonds 
In the event that you lose a trial as a defendant and want to appeal, you’ll have to purchase appeal bond, which serves as a promise that you’ll pay the amount of the original judgement should you lose the appeal. It’s important to note that you’ll also need to pay fees, interest, and provide collateral in addition to the cost of the bond itself. 

Trustee bonds 
A requirement by the court, trustee bonds must be purchased by those who are appointed as trustees. If you manage property through a trust or oversee other assets, a judge appoint and also oversee the costs of the bond.   

How do I get a surety bond?

In most cases, obtaining a surety bond is a simple process. First, start with your insurance agency and ask about surety bonds. You’ll then need to sign an indemnity agreement, which is a promise to use personal assets to pay the surety in the event of a claim. If you lack the assets to pay the claim, the surety will cover the costs.   

Roehr Insurance Agency provides surety bonds for our clients. Give Tina Arvizu a call at 513-985-4213 to start the process.

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