Quick answer
A surety bond is a three-party guarantee: a surety company promises a customer or government agency (the obligee) that your business (the principal) will follow the law or finish a contract. If the surety pays a valid claim, you must repay it. Bonds protect your customers, while insurance protects your business.
Key facts
- The three parties
- Principal (your business), obligee (who requires the bond), surety (the guarantor)
- Who it protects
- Your customers or the government, not your business
- Do you repay claims?
- Yes. The principal must reimburse the surety for paid claims
- How it's priced
- Usually a percentage of the bond amount, based mainly on your credit
- Common types
- License & permit, contract (bid, performance, payment), court, fidelity
On this page 12 sections
What it covers
- Customers harmed when a bonded business breaks licensing laws or regulations
- Project owners when a contractor fails to finish a bonded contract
- Subcontractors and suppliers who aren't paid on a bonded project (payment bonds)
- Clients whose property is stolen by a bonded employee (fidelity or janitorial bonds)
- Government agencies that require proof you'll follow license rules
What it doesn't cover
- Your own losses: a bond does not pay your business anything
- Injuries or property damage you cause (that's general liability)
- Professional mistakes (that's professional liability)
- Claims you can't repay: the surety will come back to you for reimbursement
- Your employees' injuries (that's workers' compensation)
Coverage that pairs well with it
-
General liability Essential
Third-party injuries and property damage.
"Bonded and insured" means you have both. Most licensing boards and clients expect general liability alongside a bond.
-
Workers' compensation Recommended
Employee injuries and lost wages.
Often required for contractor licenses once you have employees.
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Tools & equipment Optional
Stolen or damaged tools and gear.
Bonds and liability insurance don't cover your own equipment.
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Commercial auto Recommended
Vehicles owned by your business.
Trade businesses that are bonded usually also drive to job sites.
What is a surety bond?
A surety bond is a written promise that your business will do what it said it would do: follow licensing laws, finish a construction project, pay subcontractors, or act honestly with a client's property. Unlike an insurance policy, which has two parties (you and the insurer), a bond has three parties:
| Party | Who it is | Role |
|---|---|---|
| Principal | Your business | Buys the bond and promises to meet the obligation |
| Obligee | The customer, project owner or government agency | Requires the bond and can make a claim on it |
| Surety | A surety company | Guarantees the promise and pays valid claims |
If you break the promise, the obligee files a claim. The surety investigates and, if the claim is valid, pays it. Then comes the key difference from insurance: you must repay the surety. When you get a bond you sign an indemnity agreement, which makes you (and often the owners personally) responsible for reimbursing any claim the surety pays, plus its costs.
Surety bond vs insurance
People often say "bonded and insured" as if it were one thing. It's two different protections:
| Surety bond | Business insurance | |
|---|---|---|
| Who it protects | Your customer or the government | Your business |
| Parties | Three (principal, obligee, surety) | Two (you and the insurer) |
| After a paid claim | You repay the surety | The insurer absorbs the loss (minus your deductible) |
| Main purpose | Guarantees you'll meet an obligation | Transfers financial risk away from you |
| Typical buyer | Contractors, licensed trades, businesses entering contracts | Almost every business |
Because a bond doesn't protect your business, you still need insurance such as general liability to cover lawsuits over injuries and property damage.
Common types of surety bonds
License and permit bonds
Many states, counties and cities require a license bond before they'll issue certain business licenses. A contractor license bond is the most common example. Other businesses that are often asked for one include auto dealers, freight brokers, mortgage brokers, notaries and some home-improvement trades. The bond protects the public if you break the rules that come with your license. The required amount is set by the agency that issues the license, so check your license application.
Contract bonds
Used mostly in construction, especially on public projects:
- Bid bond: guarantees you'll sign the contract at the price you bid if you win.
- Performance bond: guarantees you'll complete the project according to the contract.
- Payment bond: guarantees you'll pay your subcontractors, workers and suppliers.
Public projects often require performance and payment bonds, so a general contractor bidding on government work should build a relationship with a surety early.
Court bonds
Required in some legal proceedings, for example to appeal a judgment or to serve as an estate administrator. These are usually personal rather than business needs.
Fidelity and janitorial bonds
A fidelity bond (also called an employee dishonesty bond) protects against theft by employees. A janitorial bond is a common version for cleaning businesses and others who work inside clients' homes and offices. Some of these bonds pay the client directly, others reimburse your business. Read the bond terms to see who is protected.
How much does a surety bond cost?
You don't pay the full bond amount. You pay a premium, usually a small percentage of the bond amount, typically for a one-year term. The main pricing factors are:
- Your credit. Strong personal and business credit usually means a lower rate.
- The bond amount. Higher bond amounts mean higher premiums.
- The bond type. License bonds are generally simpler to get than large performance bonds.
- Your experience and finances. Contract bonds may require financial statements and a track record.
There is no single national price, and rates vary by surety, state and bond type. Get quotes from more than one surety or bond agent. Remember that the premium isn't the only cost: if a claim is paid, you owe the surety the full amount.
Do you need a surety bond?
You need one when someone requires it: a state or local licensing agency, a court, or a project owner in your contract. Bonds are common for:
- General contractors, electricians, plumbers, roofers and HVAC contractors in places that require a contractor license bond
- Cleaning businesses that want to advertise as "bonded" to win client trust
- Businesses bidding on public construction projects
If nobody requires a bond, you usually don't need one. Spend your budget on the insurance that protects your own business first.
What happens when someone files a bond claim?
- The obligee files a claim with the surety, explaining how the principal failed to meet the obligation.
- The surety notifies you and asks for your side of the story and supporting documents.
- The surety investigates. It reviews the contract, license rules and evidence from both sides.
- The claim is resolved. If the claim isn't valid, it's denied. If it is valid, the surety may ask you to fix the problem first or may pay the obligee up to the bond amount.
- You reimburse the surety. Under your indemnity agreement, you repay what the surety paid plus its costs.
Example: A homeowner says a licensed contractor took a deposit and never started the job. The homeowner files a claim against the contractor's license bond. The surety contacts the contractor, who has no records showing work began. The surety pays the homeowner and then requires the contractor to repay the full amount. Responding quickly and keeping good records gives you the best chance of resolving claims before they're paid.
Getting bonded with bad credit
Credit matters, but a low score doesn't always mean you can't get bonded:
- Small license and permit bonds are often available to applicants with weaker credit, usually at a higher premium.
- Some sureties run programs for higher-risk applicants. A bond agent who works with several sureties can shop your application.
- Collateral may be requested for larger bonds or weaker applications.
- Improve your file over time: pay bills on time, reduce debt, keep clean business financial statements and build a record of completed projects. Many principals see lower rates at renewal as their credit improves.
How to avoid bond claims
- Follow your license rules and keep your license current.
- Put contracts and change orders in writing.
- Pay subcontractors and suppliers on time and keep records.
- Respond quickly to customer complaints before they become claims.
- Screen employees who work in clients' homes or handle money.
How to get Surety Bonds
- Find out which bond you need
Check your license application, contract or court order. It names the bond type and the bond amount required.
- Gather your information
Have your business details, license number, ownership information and the obligee's name ready.
- Apply with a surety
Apply through a surety company or a licensed bond agent. Many small license bonds are approved quickly.
- Expect a credit check
For most bonds the surety reviews your personal and business credit. Larger contract bonds may also require financial statements.
- Pay the premium and file the bond
Pay the premium, sign the indemnity agreement, and file the bond with the obligee, often the state licensing agency.
Frequently asked questions
What is a surety bond in simple terms?
A surety bond is a guarantee that your business will meet an obligation, like following license laws or finishing a contract. If you don't, the surety pays the harmed party up to the bond amount, and then you must repay the surety. It protects your customers, not your business.
Is a surety bond the same as insurance?
No. Insurance protects your business and the insurer absorbs covered losses. A surety bond protects your customer or the government, and you must reimburse the surety for any claim it pays. That's why many businesses are both bonded and insured.
What does 'bonded and insured' mean?
It means the business has a surety bond, often a license or janitorial bond, and also carries insurance such as general liability. The bond guarantees the business will follow the rules or contract terms, while the insurance pays for injuries and property damage the business causes.
How much does a surety bond cost?
You pay a premium that is usually a small percentage of the bond amount, often for one year. The rate depends mainly on your credit, the bond amount and the bond type. Compare quotes from several sureties or bond agents, because rates vary.
What is a contractor license bond?
A contractor license bond is a surety bond that some states and cities require before issuing a contractor license. It protects customers and the public if the contractor breaks licensing laws. The licensing agency sets the required bond amount.
Do I have to pay back a surety bond claim?
Yes. When you get a bond you sign an indemnity agreement. If the surety pays a valid claim, you must reimburse it for the claim and its costs. Owners are often personally responsible too.
Can I get a surety bond with bad credit?
Often yes, especially for smaller license bonds, but you'll usually pay a higher rate. Some sureties offer programs for applicants with weaker credit. Improving your credit and business financials can lower future bond premiums.
Sources
- U.S. Small Business Administration — Get business insurance
- U.S. Small Business Administration — Surety bonds
- National Association of Insurance Commissioners (NAIC)
We cite official agencies and published industry data. See our editorial policy. Found an error? Tell us.
This guide is general information, not insurance, legal or financial advice. Coverage, exclusions and prices vary by insurer and state. Always read the policy and ask a licensed agent before you buy.