Surety Bonds: What They Are and When You Need One

A surety bond is a contract between three parties known as the principal, surety, and obligee. Surety bonds financially guarantee that a principle will fulfill a predetermined set of obligations to an obligee. The “surety” is an insurance company providing the financial guarantee to the obligee on behalf of the principal.

A surety bond is a way to transfer risk and is designed to protect public or private interests from the actions of a third-party. You can think of a surety bond as a form of insurance that’s for the benefit of one party, paid for by a second party, and financed by a third party.

A commercial surety bond will protect public interests and are usually mandated by government agencies. These government agencies will require that new businesses in a specific sector, get a commercial surety bond. 

Are Surety Bonds Right for You? 

Depending on your industry or company type, surety bonds might be a requirement such as obtaining a construction license, bidding on a public works project, or part of a specific industry like alcohol and tobacco. You might also willingly get a surety bond to minimize an obligee’s risk.

A surety bond is right for companies that want to minimize risk, ensure the compliance and completion of a project, or do business with a new partner. Specifically, surety bonds are right for the following types of companies:

  • Construction & other businesses with government-issued licenses
  • Construction companies with government projects over $100k
  • General contractors who are bidding on new projects
  • Businesses in high-risk or high-tax sectors, such as alcohol and tobacco
  • Businesses that need to insure customer property, such as auctioneers
  • Companies that want to protect themselves against employee theft
  • Companies that expect to face litigation in the near future

Regardless of whether it’s required, a surety bond should be taken out prior to the initiation of any contract.

Rates, terms, and qualifications of a surety bond range based on the bond-type as well as the insurance company. Terms are generally between 1 – 4 years. However, there are some surety bonds that denote that they’re “continued until cancellation”, protecting the obligee indefinitely until the principal cancels the bond.  

Obtaining Protection 

The “bonding process” is part of the application process. Before a surety bond is issued, a surety will evaluate and qualify the principal to ensure they have the resources and capacity to fulfill the terms and conditions of a bonded contract at the benefit of the obligee.

As part of the bonding process, a surety requires your personal credit score, most recent year-end financial statement, and past 3 years of the company’s year-end financial statements. If there are multiple business owners, each credit score is factored in. From there, your commercial surety bond provider will underwrite a surety bond based on the financial information gathered. 

About Arroyo Insurance Services

Arroyo Insurance Services was officially established in 1986, but we have roots dating back to before 1950. One of California’s leading client-oriented and independently owned agencies, we have over 140 employees with a combined experience of over 450 years, spread across 11 locations. We are committed to providing the best insurance and risk management services at the most competitive premiums, and backing it with hands-on service tailored to our customers’ needs. For more information on how we can mitigate your risks, contact us today at (877) 220-4769.