What Are the Different Types of Commercial Surety Bonds?

When you start bidding for large-scale contracts, you’ll want to have commercial insurance to protect yourself—but who protects your client?

That’s the purpose of a commercial surety bond: it guarantees them that you will finish the project on time without deviating from the conditions stated in the contract and in accordance with the standards stipulated therein.

A bond also ensures your business complies with the licensing requirements stated in a contract while working on the project. The benefits are twofold: it legitimizes you and shows you are capable of taking on the associated risks.

But exactly how does a surety bond work? What are its different subtypes?

We’ll discuss all that and more in this blog.

What Is a Commercial Surety Bond?

Due to the large risk that some contracts carry, your actions (or inaction) could result in major losses for the client. A bond prevents this from happening by assuring your client that you are trustworthy and can get the job done right.

Commercial surety bonds also protect the public’s interest by guaranteeing a contract’s conditions will be fulfilled in accordance with all relevant regulations. This helps avoid complications that may affect otherwise unrelated parties.

Unlike insurance, commercial surety bonds are three party agreement:

• The Principal: the party who has an obligation to complete the project
• The Surety: the entity assuming the financial obligation if for some reason the principal fails to meet the requirements of their contract
• The Obligee: The client (normally a government entity) who requires the surety bond before awarding the contract to the principal

Who Benefits From a Surety Bond

While it may seem as if surety bonds only benefit the obligee, obtaining a bond also protects your subcontractors and suppliers by guaranteeing they get paid.

The process of obtaining a surety bond is thorough, with the surety provider extensively checking your financial background and capabilities. Clients are much more likely to trust you and your work if you obtain one, making you a desirable employer.

Commercial Surety Bond Types

License and Permit Bonds

This type of surety assures your client you will comply with state regulations, local building codes, safety protocols, and other laws while completing the project. License and permit bonds also prove you meet the professional standards required by your client.

They are typically used by auto dealerships, roofers, carpenters, landscaping businesses, construction companies, other contractors, or by any type of business that needs a license before legally starting a project.

Judicial Bonds

These are bonds required in legal proceedings in both civil and criminal cases. Its purpose is to guarantee that the parties involved in a case can pay for fines and other related costs should they fail to perform their duty dictated by the court.

They are commonly used by plaintiffs and defendants in court, but could also be required by a judge or by law during the execution of a will.

Miscellaneous Bonds

Miscellaneous bonds cover bonds that don’t fall under a specific category—they are the bond equivalent to umbrella insurance, so to speak.

Some examples of what may be covered include leases, rent, utility bonds, car wash bonds, or travel agency bonds. Just like other types of sureties, miscellaneous bonds ensure the client’s needs will be met and the conditions of a contract will be fulfilled on time.

Non-contract Bonds

Non-contract bonds do not guarantee a contract but are required by the state or by law. They could include public official bonds, which are required by elected public officials, service contract bonds, or supply bonds.

Public Official Bonds

This type of bond is specific to public officials and guarantees they will remain accountable to the public. Simply put, it protects against conduct that breaches public trust and serves as a guarantee against fraud or dishonest work.

For instance, public officials responsible for city financial planning would need to get a public official bond to provide assurance to their constituents that they will perform their duties faithfully in accordance with the law. The bond will be in effect for the duration of their term in office unless otherwise specified.

Auto Dealer Bond

This is a bond type that all car dealers need to have before opening their auto dealerships. It’s a type of commercial surety that protects consumers from fraud or unethical business practices made by the car dealer.

Auto dealer bonds also serve as proof that the business is financially stable enough to operate. Specific requirements may be needed, depending on your surety provider.

Subdivision Bonds

This specific type of commercial surety bond focuses more on the aspects of building cities or subdivisions. It also covers improvements related to the development of a location, such as sewage systems, drainages, streets, and gutters.

They guarantee the urban developer will complete the project according to the conditions set in the contract, including state laws and regulations.

While often mistakenly put under the construction bond category, subdivision bonds only provide assurance that the required construction and improvements will be made by the developer.

Expert Surety Bonding and Insurance Solutions at KASE

KASE Insurance is the top choice of contractors when it comes to their surety and insurance needs, no matter what they need.

We’ve been in the business for years, so we know what to offer in terms of customized solutions at an affordable price. Our experts at KASE stand ready to assist you if you have questions about commercial surety bonds.

Contact us today to learn more about our services or to get started with a quote!