Surety bonds can be a complex topic, especially for those who are new to running their own business or working as a licensed professional in certain fields. In many industries, surety bonds are required as a way to help protect against faulty or fraudulent business practices. When a surety bond is in place, a surety bond agency promises to pay on valid claims may by the individual or entity requiring the bond, such as a municipality or business requesting the work. The contractor or licensed professional holding the bond then repays any claim amount paid on their behalf by the surety company. This is a form of credit from the surety agency to the bondholder, but ultimately, it protects the job owner or customer from financial losses.
The number of parties involved in a surety bond agreement makes the process of securing a bond confusing for some. Compounding on this issue is the reality that there are many different types of surety bonds, both standard and custom. Here you can learn about the various bond types for different professionals, contractors, and business owners. This information lends a hand in making the right decision for the type of bond needed in specific circumstances.
Various Contract Bond Types
The most common type of surety bond is known as a contract bond. This type of custom bond provides that construction work performed by licensed contractors will be conducted in a way that is in line with regulations as well as what is agreed to within the construction contract. General construction contractors, small and large construction companies, and certain subcontractors are required to have a contract bond in place if they want to operate legally.
In most cases, a contract bond is required as part of commercial and federal projects; depending on the city or state in which work is performed, a bond may not be required for small-dollar-amount residential projects.
License and Permit Bond Types
In addition to contract surety bonds, licensed professions in various other industries may also be required to secure a bond, including:
- Mortgage brokers or brokerage businesses offering mortgage services to individual or commercial customers
- Insurance agents providing insurance services or sales to clients
- Auto dealers operating a business that sells vehicles to the public
- Collections agencies that collect on debts as a third party business or individual
Each of these license and permit bonds is required, depending on the state regulations business owners in these industries must abide by. In order to operate legally as a business in one of these industries, a surety bond is a necessary part of the licensing process. The bond amounts and prices differ from state to state, making it essential for licensed professionals to research their specific requirements before going into business.
Other Custom Bond Types
License and permit bonds, as well as contractor bonds, are more common than other customer bond types, such as court bonds, customs bonds, and fidelity bonds. Court bonds, which many include appeal, fiduciary, executor, or lien release bonds, are required in certain cases by the judicial system, either on a state or federal level. Customs bonds are mandated for those businesses that import merchandise into the United States from other countries. A customs bond is meant to ensure that a company is operating in line with federal import regulations.
A fidelity bond offers protection to a business should an employee steal from the company. Fidelity bonds are not always a requirement like other custom bond types, but they can be a valuable protection strategy for business owners.
Several bond types exist in the business world, but not every business owner or company needs the same type of bond. Understanding which bonds are required by law based on the work performed in a business makes it easier to ensure the company or licensed professional has what is needed to operate legitimately.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bond. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.