Business insurance · Guide
Surety bonds explained: what they are and how they work
6 min readBy the Goodsurance editorial team Reviewed by the Goodsurance editorial team
A surety bond is a written guarantee that a business will do what it has agreed or is required to do. It is not insurance in the usual sense, even though it is often arranged alongside business coverage. It brings together three parties: the business that must perform, the party that needs the assurance, and the surety that stands behind the promise.
What a surety bond is
The short version
- A surety bond is a three-party guarantee that a business will meet an obligation.
- The parties are the principal (the business), the obligee (who requires the bond), and the surety (who backs it).
- It is often required to get a license or to bid on a contract.
- If the principal fails to perform, the surety pays the obligee and the principal must repay the surety.
A surety bond is a promise backed by a third party. A business, called the principal, agrees to fulfill an obligation to another party, called the obligee. A surety company stands behind that promise and guarantees it. If the business does not follow through, the surety compensates the obligee, then looks to the business to be repaid.
Bonds show up most often around licensing and contracts. A contractor may need one to pull a permit, and a government agency may require one before awarding a project. The bond gives the obligee confidence that the work or obligation will be honored.
In short: a surety bond is a three-party guarantee that a business will do what it promised, with the surety backing the promise.
How a surety bond differs from insurance
It is easy to confuse a surety bond with an insurance policy, but they protect different people. Insurance protects the party that buys it. A surety bond protects the obligee, not the business that pays for it.
There is another key difference. With insurance, the insurer expects some level of losses and prices for them. With a surety bond, the surety expects no losses. If the surety has to pay a claim, the business is obligated to pay that money back. In that sense a bond is closer to a line of credit than to insurance coverage.
This is why qualifying for a bond looks closely at the strength and track record of the business. The surety is betting the business will perform.
In short: insurance pays to protect you, while a surety bond protects someone else and you must repay any claim the surety covers.
Common types of surety bonds
The short version
- License and permit bonds let a business meet a licensing requirement.
- Contract bonds back a business that is bidding on or performing a project.
- Court and fidelity bonds cover other specific legal or trust obligations.
Surety bonds come in many forms, but most fall into a few groups. License and permit bonds are required by a government body before it will issue a license, and they guarantee the business will follow the rules that come with it. Contract bonds, common in construction, guarantee that a contractor will bid in good faith, complete the work, and pay suppliers and subcontractors.
Beyond those, court bonds support obligations tied to legal proceedings, and fidelity bonds protect against dishonest acts by employees. Which bond you need depends on the license or contract in front of you. If you are being asked to provide a bond, please contact us to discuss your options.
In short: the common types are license and permit bonds, contract bonds, and court or fidelity bonds, each tied to a specific obligation.
Common questions about IRMAA appeals
Quick answers, fast .
Tap any question to expand. Each links to a fuller standalone answer.
Is a surety bond the same as insurance?
No. Insurance protects the party that buys it, while a surety bond protects a third party, the obligee. If the surety pays a claim, your business has to repay it, which makes a bond closer to a guarantee than to insurance.
Who are the three parties to a surety bond?
The principal is the business that must perform the obligation, the obligee is the party that requires the bond, and the surety is the company that guarantees the obligation and pays the obligee if the principal fails.
What happens if a claim is made on my bond?
The surety investigates and, if the claim is valid, pays the obligee up to the bond amount. Your business is then responsible for reimbursing the surety, since a bond is a guarantee rather than insurance coverage.
References
- Surety bonds (U.S. Small Business Administration)U.S. Small Business Administration overview of what surety bonds are, the parties involved, and the bond guarantee program for small businesses.
- Insurance glossary: surety bond (Insurance Information Institute)Insurance Information Institute glossary entry defining a surety bond and how it functions as a guarantee.