How Does a Surety Bond Work?

You are starting a new venture and have just been informed that you need to get a surety bond. You feel like your never ending list just to get started has expanded into an area you know nothing about. Well rest easy, we’re here to make this as simple as possible. Read on to learn what surety bonds are, what they do, what they cost, and potential issues you may encounter. In this article we will specifically be referring to commercial bonds, click here to learn how contract bonds work.

First, what is a surety bond and why do I need it?

The abbreviated story is a surety bond is a three party agreement. It involves you, the surety (typically a large insurance company) and the people telling you to get a bond (the obligee). The bond is put in place to guarantee something, there are a lot of surety bonds types out there, but in short they all guarantee you will abide the rules. These bonds do not protect you, but rather your customer (or the obligee in the case of financial guarantee bonds). Get more detailed information on what surety bonds are here.

What do you need to get bonded?

Are you ready to get going? Commercial bonds will be underwritten using a verity of tools; among them are person credit, personal and business financials, and the legal language used on the bond form itself. Learn more about the information you must provide to get bonded here.

After a review of the above information, you will be assigned a rate by your underwriter. This rate multiplied by the bond amount required will get you your annual premium. For example, if you are required to get a $25,000 Florida Motor Vehicle Dealer Bondm, and the underwriter assigns you a 2% Rate, then you yearly premium will be $500. Read on here to learn more about the cost of a surety bond, and ways to reduce your premium.

Potential Pitfalls: Claims against your bond

Now that your surety bond is in place it’s time to learn how it really works, and you may be surprised. As we discussed earlier, a bond is there to guarantee something. Let’s revisit the previous example of the $25,000 Florida Motor Vehicle dealer bond. Let’s say the bond is now on file with the obligee (the state is the obligee in this instance) and the dealer has opened for business. If the auto dealer abides by the rules and regulations of his auto dealership license as set forth by the state, then the bond itself goes mostly unnoticed. The surety bond only goes to work when a claim is filed.

Pretend in this example scenario, the Florida MVD was to sell a car, yet never transfer the title to the customer’s name after the purchase. The customer who bought the car could file a claim against the auto dealer’s bond for the cost of the car. The surety would then investigate, and if they found the claim to be legitimate, the bond would pay out to the customer. As you can see from this example, surety bonds are required as consumer protection guarantees.

This is sounding a lot like insurance isn’t it? Well a surety bond is very different than insurance. With traditional insurance, you pay your premiums, and if you have an incident, the insurance covers the damages. Sure, your premiums might go up a little bit, but all is forgiven. Surety bonds are not like that. When a bond claim is paid on your bond, the surety will look to you for repayment in full. Further, a paid bond claim may affect your future ability to get bonded.

So why do I need a surety bond? Why can’t I just take the risk that somebody sues me someday? If these don’t protect me, why should I pay for them? These are typical questions new business owners ask themselves. As confusing and scary as surety bonds can sound, the bottom line is, if you’ve been told you need a surety bond, you simply cannot legally operate your business without one. The reality of business is, consumers want to know they are protected. But, if you run a responsible business and resolve issues as they come up, you won’t ever have to worry about your bonds being paid out.

Annual Renewals

Finally, most bonds are renewed annually (though some have specific language on the bond form that calls for a different term). Bryant Surety will automatically shop the lowest rates for you each year, and contact you with your lowest possible rate at renewal time, so all you need to worry about is your day to day operations, and we take care of the rest.

Still Have Questions?

Still haven't found the answer you are looking for?
Give us a call at (866) 450-3412 or leave your question below.