What is a Surety Bond

Surety bonds are a mechanism that protect individuals and businesses from certain kinds of work or service related performance problems. For example, according to the Small Business Administration (SBA) surety bonds on contracts are like insurance, and guarantee individuals or organizations work will be finished according to pre-determined specifications. Moreover, in the case of payment surety bonds, those completing the work are guaranteed payment per the SBA.  

Depending on the service being performed and which party is seeking guarantee, specific kinds of surety bonds are used. According to State Farm Insurance, many kinds of surety bonds exist including permit bonds, contract performance bonds and public official bonds. Each type of bond serves a particular function of surety. To illustrate State Farm also claims license bonds assure clients whose contractors are ‘licensed and bonded’ that they will receive services such as electrical work within allowable standards. 

Surety bonds are not like Treasury bonds that are purchased in full and pay interest. Neither do they pay for claims like insurance companies do according to JW Surety Bonds. Rather, only a percentage of the surety bond’s full surety coverage is paid by the buyer to guarantee service, work or payment. To make a claim against a surety bond, a filing of that claim and subsequent investigation similar to other types of insurance takes place. However, unlike many types of insurance, the buyer of the surety bond and not the seller is responsible for payment or service.

If a business, contractor or official holds a surety bond, it not only gives ‘surety’ of their services, but can improve their marketability. This is because guaranteed service is more likely to have a higher value to paying clients and assuming competitive pricing and functions of a business, provides a market advantage if competing businesses are not bonded. In some cases, especially in reference to government services, surety bonds are mandated. For example, surety bonds on Medicare equipment supplier services are required by the Department of Health & Human Services.

For buyers of services, it may not be enough if a business simply states it is bonded. The specific type of bond and the buyer’s right to make claims against that bond are ideally verified for good measure. To confirm the authenticity of surety bonds the registration of the surety bond issuer can be confirmed with the U.S. Treasury Department. Following this, and upon successful identification of issuer legitimacy, that issuer or surety company can also be contacted to confirm whether or not a specific company or service provider is indeed bonded.