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What Are Insurance Surety Bonds?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 30 October 2016
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Insurance surety bonds are lines of credit or guarantees that are issued by an insurance company. In reality, they are not typically called insurance surety bonds, but simply surety bonds. Generally, a surety bond is purchased by a contractor or company as a guarantee for a client. In the legal system a surety bond may also be purchased, but this is not typically from an insurance company, but rather a bond company, such as a bail bonds company.

The surety bond guarantees that the contractor or business is financially capable of completing the work, and if not, then the client has the surety bond money to hire another contractor to complete the work.

These bonds can level the playing field with small and big businesses. An insurance surety bond may be a necessity or requirement for landing a contact with a business. This is especially true if the contract is with a federal or government agency.

Several factors go into figuring the cost to establish an insurance surety bond. As a general rule, the buyer will pay a premium for every $1,000 US Dollars (USD) of coverage. The rate may vary, however, depending on the credit and work history of the company applying for the bond. Another factor for the price is the specific type of insurance surety bond the company is buying.

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Generally, there are three primary categories for insurance surety bonds. The three categories include commercial, contractor and court. Commercial and contractor bonds are generally in use for contracts and business purposes. Court bonds, on the other hand, generally pertain to criminal cases that allow an alleged wrongdoer out of jail, but guarantee that they will show up for their court case.

The primary benefit of an insurance surety bond for a contractor or business is that it alleviates them from having to put up a lot of money upfront when doing a job. In lieu of putting up cash as collateral for the job or contract, the business is able to establish the surety bond instead. Surety bonds are a much more cost effective way of conducting business than having to come out of pocket for the cash required as collateral.

Insurance surety bonds also create peace of mind for the individual clients or agencies that are hiring the contractor or business to complete the work. A surety bond is a type of insurance that is there for them if they need it.

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