What Is a Surety Bond and Why Is It Required in Contracts?

When a contractor bids on a public construction project or a business applies for a state license, they’re often required to secure a surety bond before any work begins. Surety bonds make up critical components of many businesses’ risk management and loss control efforts, and failing to maintain them could hinder growth and lead to costly losses.

How a Surety Bond Works

A surety bond generally involves three parties:

• The principal—The business or individual required to obtain the bond
• The obligee—The party requiring the bond, often a government agency or project owner
• The surety—The bonding company that guarantees the principal’s performance

If the principal fails to meet the terms of a contract or license, the obligee can file a claim against the bond. The surety pays up to the bond amount, then seeks reimbursement from the principal.

Common Types of Surety Bonds

Your business may encounter surety bond requirements that include contract bonds for construction projects, license and permit bonds mandated by state or local agencies and fidelity bonds to protect clients from dishonest or criminal acts committed by your employees. Each type carries its own requirements and bond amounts, which vary by industry, project size and jurisdiction.

Why Contracts Require Them

Surety bonds financially protect the party receiving services from losses and damages if the other party defaults, abandons a project or violates licensing terms. Many public contracts and regulated industries require them by law, and private project owners increasingly include them as a condition of doing business. Without these measures in place, clients and other parties may have no way of recovering losses for which you’re responsible other than potentially filing a lawsuit, which could have far greater costs than purchasing a bond in the first place.

Protect Your Business With the Right Bonding Coverage

Contact MSB Insurance Group to review your bonding requirements and make sure your coverage is structured to protect your business and fulfill your obligations.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.