Basics of Surety Bonding

What is a surety bond?

In the simplest terms, a surety bond is a guarantee. What the bond guarantees varies depending on the language of the bond. It is a form of credit, not insurance.

What is the process to obtain a bond?

To start the process you need to apply and depending on the type & size of bond you need, approval can be as fast as 24 hours or as long as 6 weeks. You will then be given your premium cost and an indemnity agreement to sign between you and the bonding company.

How do surety bonds work?

The surety extends "surety credit" to make the required guarantee (the bond). A claim can arise when the principal does not abide by the terms of the bond. In the event of a claim, the surety will investigate to ensure it is valid. If the claim is valid, the surety will look to the principal for payment of the claim and any associated legal fees.

What good is a bond if I have to pay for claims?

A bond is not insurance, it is a form of credit where the principal (you) are responsible to pay any claims. The alternative to a bond is to post cash or a letter of credit.

How much do surety bonds cost?

Bond premiums vary greatly depending on the applicant, the bond type, surety, and the obligee. Just like other forms of credit, everyone does not receive the same rate. Standard market rates are typically anywhere from 1-3%, while higher risk markets can range anywhere from 5-20% of the bond amount.

Why do I need a surety bond?

Simply because a government authority or private entity is requiring the bond in order for you to operate. The bond ensures you will follow their guidelines.

Who is the obligee?

The obligee is whoever is requiring the bond of you. For example, the obligee for a contractor would be whoever they are doing the work for. The obligee for a license bond (e.g. auto dealer or mortgage broker) would be whoever they are filing their license with.

What is a bond form and where do I get one?

It is a blank copy of the bond that you are required to post. It states exactly what the bond is guaranteeing. You need to obtain a blank copy of the bond form from the obligee. Many times it will be included in your contract with the obligee.

Why does my spouse have to sign the indemnity agreement?

Bonding companies have several reasons why they would like your spouse to personally guarantee the bond. Keep in mind, a bond is a guarantee of something. The bonding company does the best they can to underwrite your policy, but have no way to gauge your character. A good way to do this is to have your spouse personally guarantee it, as they know you best. Spouses are also required to sign, as married couples have joint assets which may have to be sought after in the event of a claim.

McCormick Insurance Bond Forms

Surety Bond Types