Surety bonds build trust between businesses, the public, and the government. There are different types of surety bonds, and each state has its own requirements. However, most bonds can be grouped into four main categories:
- License and Permit Bonds
- Contract Bonds
- Court Bonds
- Fidelity Bonds
Let’s look at what each type does and when you might need one.
What Is a Surety Bond?
Before we dive into each type, it’s important to understand how surety bonds work.
A surety bond is a formal contract that involves three parties:
- Principal: The individual or business that requires the bond (that’s you).
- Obligee: The agency or customer requiring the bond.
- Surety: The company that issues the bond.
You, as the principal, buy the bond by paying a premium, usually once a year. This shows your commitment to following the law or completing a job properly.
If you don’t meet your responsibilities, the obligee (the person who hired you) can make a claim. If the claim is legitimate, the surety company will compensate the obligee. Then, you must repay the surety for the amount they paid out.
1. License and Permit Bonds
Many state and local governments require these before a business can get licensed. Click here to learn more about how they are also referred to as commercial or business bonds.
Common Examples:
- Contractor License Bond: Contractors are legally required to be registered to work in many states. Premiums are usually under 1% of the bond amount.
- Plumbing Contractor Bond: Guarantees that a plumber will use proper materials and meet safety rules. Required in places like Illinois, Minnesota, and Washington D.C. The costs can vary from less than 1% to 10% of the bond amount.
- Home Improvement Contractor Bond: Needed before working on a home building or remodelling. Protects homeowners if the work is not done properly. Premiums are usually 1% to 5%.
- Process Server Bond: Needed for people who deliver legal papers in court cases. These are required in states such as California, New York, and Florida. Premiums are a small part of the bond amount.
- Legal Document Assistant (LDA) Bond: Needed for people who help others prepare legal documents. Required in California and Nevada. For example, in Nevada, you might need a $50,000 bond, which can cost around $400 a year.
- Auto Dealer Bond: Required by the DMV for car dealerships. Also called motor vehicle dealer (MVD) bonds. They protect customers from fraud. Premiums are typically around 1% of the required bond amount.
- Mortgage Broker Bond: Needed for mortgage brokers or loan originators. These show that brokers will follow the law and act ethically. Premiums are usually around 0.6% of the bond amount.
- Collection Agency Bond: Needed by businesses that collect debts for others. Shows that the agency will act honestly. Premiums typically range from $100 to $500 annually, depending on the state and bond size.
2. Contract Bonds
Contract bonds are used in construction projects to ensure the job gets done and everyone is paid.
Common Types:
- Bid Bond: Required when bidding on public construction projects. If you win the bid, this bond guarantees you’ll accept the job and do it.
- Performance Bond (Credit Only): Ensures you will finish the job as agreed. With good credit, you may not need to provide financial documents. These are often used for contracts under $1 million. The cost is approximately 3% of the bond amount.
- Grading Bond: Required for construction work that moves large amounts of dirt, such as grading land for buildings. These are also called grading permit bonds. They cost about 0.875% of the total bond amount.
If you don’t complete the project or pay workers, the surety company may step in and finish the job or cover the costs.
3. Court Bonds
Court bonds are required for individuals involved in legal proceedings. They help protect people from financial loss during legal proceedings.
Common Types:
- Probate Bond: Required if you’re appointed to manage someone else’s estate or property after they pass away. Also called fiduciary bonds or estate bonds. They guarantee you’ll act honestly. Premiums start at about 0.5% of the bond value.
- Appeal Bond: Required if you want to appeal a court decision. This guarantee will pay the original judgment if the appeal is unsuccessful. Costs are usually around 1% of the bond amount, and you may need to offer collateral.
- Trustee Bond: Needed if you are named a trustee to manage assets in a trust. This bond protects the people who benefit from the trust. The judge sets the cost based on the value of the trust.
4. Fidelity Bonds
Fidelity bonds are a type of business insurance. They protect a company if an employee steals money or commits fraud.
Common Types:
- Fidelity Bond: Protects a business from employee theft or dishonest actions. Common in banks and finance companies. Premiums typically range from 1% to 3% of the bond amount.
- ERISA Bond: Required for businesses that manage employee benefit plans, like 401(k)s. Anyone who manages funds must be bonded for at least 10% of the assets they handle. These bonds typically cost around 1% of the total coverage for a three-year term.
- Third-Party Administrator Bond: Needed for businesses that manage benefits or handle claims for other companies. These are required in many states for getting a license. Premiums typically range from 1% to 15%.
Getting the Right Bond
Surety bonds don’t just protect customers—they also add trust to your business. They show that you’re serious about following rules and doing good work.
To get the right bond:
- Check your state’s requirements – Bond rules vary by location and industry.
- Find a reliable bond provider – Look for licensed agencies with experience.
- Get a quote – Your premium depends on your credit, bond size, and risk level.
Surety bonds help your business grow by building trust with clients and the government. Now that you know the common types, you’re better prepared to find the one you need and start your next project with confidence.