Question 1

What is a surety bond?

Accepted Answer

A surety bond is a three-party contract in which a surety company guarantees that one party (the principal) will fulfill an obligation to another party (the obligee). The two main families are contract surety bonds (bid, performance, payment, and maintenance bonds used in construction) and commercial surety bonds (license, permit, probate, fidelity, freight broker, and similar bonds required by government agencies or private businesses). Federal projects above $150,000 typically require contract bonds under the Miller Act, and most states have similar rules.

Question 2

What is the difference between a surety bond and insurance?

Accepted Answer

Surety bonds and insurance both transfer risk, but they work in opposite directions. Insurance protects the policyholder — if a covered event happens, the insurer absorbs the loss (minus a deductible). A surety bond protects the obligee, not the principal — if the principal defaults, the surety pays the obligee and then seeks reimbursement from the principal. That's why surety bonds are written assuming zero losses, which is how premiums stay at 1–3% of the bond amount.

Question 3

How do I get a surety bond?

Accepted Answer

The process depends on the bond type and amount. Small license and permit bonds can often be issued the same day with just a credit check and an application. Larger contract bonds (performance, payment, bid) require full underwriting — the surety reviews your business financials, work-in-progress schedule, personal credit, and references. Most contract bonds are issued within 24 hours of a complete submission.

Question 4

What financial information is required for a surety bond?

Accepted Answer

Requirements scale with the bond size. Small bonds (under ~$100,000) often need only an application and personal credit. Mid-size bonds usually require business financial statements, a personal financial statement, and a work-in-progress schedule. Bond programs above $1M typically require CPA-reviewed or audited financial statements, plus tax returns and bank reference letters.

Question 5

Can I get a surety bond with bad credit, judgments, bankruptcy, or liens?

Accepted Answer

Yes — bad credit, prior bankruptcies, and even outstanding judgments don't automatically disqualify you. For commercial bonds, you typically pay a higher rate (sometimes 5–15% instead of 1–3%). For contract bonds, the SBA Surety Bond Guarantee Program can backstop your bond if your bankruptcy is discharged or your judgment is being paid down on a structured plan. Open tax liens to the IRS or state are the toughest obstacle — most sureties want them resolved or under formal installment agreement first.

Question 6

How much does a surety bond cost?

Accepted Answer

Surety bond premiums typically run 1% to 3% of the bond amount for applicants with good credit, and up to 10% for high-risk applicants. The exact rate depends on the bond type, bond amount, your credit profile, and (for contract bonds) your company's financial strength. Larger bonds usually carry lower percentage rates, and multi-year commercial bonds often receive prepayment discounts.

Question 7

Does my spouse have to sign the indemnity agreement?

Accepted Answer

Usually yes, even if your spouse has no ownership in the business. The indemnity agreement is what gives the surety the right to recover losses from you personally. Including your spouse prevents the principal from shielding assets by transferring them to a non-signing spouse. Exceptions exist for genuinely separate-property situations, but they are uncommon and require underwriter approval.

Question 8

Why is my other business required to sign the indemnity agreement?

Accepted Answer

If you own multiple companies, the surety often requires all related entities to indemnify because they may be relying on the combined assets of those businesses to approve the bond. This is most common when one business has stronger financials than the applicant entity. If the related business is genuinely separate and not being used for underwriting support, the surety may waive this requirement.

Question 9

Can I cancel my surety bond?

Accepted Answer

It depends on the bond type. Contract bonds — bid, performance, payment, and supply bonds — generally cannot be cancelled once issued; they expire when the underlying contract is complete. Commercial bonds like license and permit bonds can usually be cancelled, often with 30–60 days' written notice, and may require obligee consent. Some bonds (like license bonds) must be replaced by a substitute bond before cancellation is accepted.

Question 10

How can I remove myself from personal liability on construction bonds?

Accepted Answer

Construction bonds don't need to be cancelled — they simply expire when the obligation is fulfilled. A performance bond ends when the project is complete and accepted by the owner; a payment bond ends when all subs and suppliers have been paid; a maintenance bond ends at the end of its warranty period. Once those obligations end, your indemnity exposure on that specific bond ends with them.

Question 11

What about using a letter of credit instead of a surety bond?

Accepted Answer

Some obligees accept letters of credit (LCs) as a substitute, but for most contractors a surety bond is the better choice. An LC ties up your borrowing capacity at the bank, reduces your working capital, and is paid on demand — the bank doesn't investigate whether a claim is valid. A surety bond is unsecured, doesn't touch your credit line, and the surety must investigate every claim before paying. Surety bonds also generally cost less than LC issuance fees over the contract term.

Question 12

What is the difference between cost overruns and cost underruns?

Accepted Answer

Contract bond premiums are based on the final contract value, not the original. If change orders push the final value above the original (an overrun), you may owe the surety additional premium proportional to the increase. If the project finishes below the original value (an underrun), the surety may refund a portion of the premium. Most sureties send Contract Status Reports to the obligee throughout the job to track this.

Question 13

What are the differences between surety bond companies?

Accepted Answer

There are more than 100 surety companies operating in the United States, and each has its own underwriting appetite — some specialize in commercial bonds, others in heavy civil construction, others in small contractors with limited bonding history. We work with multiple A-rated markets, so we shop your file rather than presenting it to a single carrier. Look for sureties rated A- or better by A.M. Best and listed on the U.S. Treasury Department's Circular 570 — both are typically required by federal and state obligees.

Question 14

What are the key differences between surety bond brokers?

Accepted Answer

In most states, any property and casualty insurance agent can technically write surety bonds — no specialized knowledge of financial statements or contract law is required. That's why bond quality varies dramatically across brokers. Look for brokers carrying NASBP (National Association of Surety Bond Producers) or AFSB (Associate in Fidelity and Surety Bonding) credentials, which require formal training in surety underwriting. A specialized broker can mean the difference between getting bonded today versus being declined.

Surety Bond FAQ: 14 Common Questions Answered by Experts

Surety Bond FAQ

Frequently Asked Questions