What this coverage is
A surety bond is a three-party agreement among the business (the principal), the party requiring the bond (the obligee), and the surety that backs the guarantee. Unlike insurance that protects the buyer, a bond protects the obligee, and the principal is responsible for reimbursing the surety for valid claims.
Bonds come in many forms, including contract bonds such as bid, performance, and payment bonds, and commercial bonds such as license and permit bonds. They are commonly required by public agencies, project owners, and licensing authorities.
Who commonly needs it
Contractors, licensed trades, and businesses that must guarantee performance or compliance commonly need surety bonds, frequently as a condition of bidding, licensing, or contracting.
Where this coverage commonly fits
Contract-driven — coverage that is often required by contracts, clients, landlords, or lenders. Surety bonds are commonly required by licensing boards, project owners, and contracts before work begins.
- Construction and contracting firms
- Licensed professionals and trades
- Auto dealers requiring dealer bonds
- Freight brokers and transportation businesses
- Energy and utility contractors
What it may cover
- Contract performance guarantees (performance bonds)
- Payment to subcontractors and suppliers (payment bonds)
- Bid guarantees on competitive projects (bid bonds)
- License and permit compliance (commercial bonds)
- Court and fiduciary obligations, where applicable
What it typically excludes
- Losses to the principal's own business
- Property damage and liability, which insurance addresses
- Obligations beyond the bond's stated terms
- Penalties for fraud or willful misconduct
- Amounts above the bond penal sum
Hypothetical claim scenarios
These illustrative examples are for general understanding only. Coverage depends on the specific policy terms, conditions, and exclusions.
Performance bond claim
A contractor is unable to complete a bonded project. The performance bond may help the project owner address completion, and the contractor is responsible for reimbursing the surety, subject to bond terms.
Payment bond claim
Subcontractors are not paid on a bonded job. A payment bond may help ensure they are paid, subject to terms.
License bond claim
A licensee fails to meet a regulatory obligation, and a claim is made on the license bond. The bond may respond, with the principal responsible for reimbursement.
What commonly affects cost
- Bond type and required penal sum
- Business and personal credit and financials
- Industry and project size
- Experience and track record
- Underwriting requirements of the surety
How much does it cost?
On average, many businesses pay roughly 1%–3% of the bond amount per year for many qualified businesses for surety bonds. That figure is a general national average only — your actual premium is set during underwriting.
- Surety Bonds1%–3% of the bond amount per year for many qualified businesses
These are general national averages shown for comparison only — not a quote. Actual premiums vary widely with underwriting and depend on the factors above and the specifics of your business, including size, revenue, location, claims history, and the limits you choose. See how we estimate costs.
Industries where this coverage is common
Coverage needs vary business to business — most companies consider this protection regardless of industry. These are simply the industries where we see it most often.
See how this coverage works in your industry
A few examples from the business types we cover — this coverage applies well beyond the industries shown here.
Don't see your business type? Browse all industries we cover — coverage recommendations are tailored to every operation.
Frequently asked questions
How is a surety bond different from insurance?
Insurance protects the policyholder against covered losses, while a surety bond protects the obligee. With a bond, the principal is responsible for reimbursing the surety for valid claims.
What are the most common types of bonds?
Common types include contract bonds (bid, performance, and payment) and commercial bonds such as license and permit bonds. The right bond depends on what is being guaranteed.
Why are surety bonds required?
Public agencies, project owners, and licensing authorities commonly require bonds to ensure that obligations will be met and to protect those relying on the principal.
What affects bond pricing?
Bond premiums commonly reflect the bond type and amount, the principal's credit and financials, experience, and the surety's underwriting requirements.
Do I have to repay a bond claim?
Yes. Unlike insurance, the principal is generally responsible for reimbursing the surety for valid claims paid under the bond.
How do I get a quote for this coverage?
Call The Southern Agency at 1-800-777-1872 or request a quote online, and an advisor can help tailor coverage to your business.
Related coverages
- Crime Insurance Coverage for losses from employee dishonesty, theft, forgery, and fraud.
- Liquor Liability Insurance Liability coverage for businesses that sell, serve, or furnish alcohol.
- Environmental Liability Insurance Coverage for pollution conditions and environmental cleanup liability.
- Garage Liability Insurance Specialized liability coverage for auto dealers, repair shops, and service garages.