Most Common Types of Surety Bonds
Here's your guide to bond types with examples of each.
There are many types of surety bonds, and each state has its own bonding requirements for different industries. However, there are four major types of surety bonds that you should know: license and permit bonds, contract bonds, court bonds, and fidelity bonds.
Bond Types at a Glance:
Basics of a Surety Bond
Before diving into the details of each bond type, let's go over the basics. Surety bonds are a guarantee of service, performance, and protection. They're a legal contract among three parties:
- Principal: The individual holding the bond.
- Surety: The company issuing the bond.
- Obligee: The business or government agency requiring the bond.
Businesses and government agencies (obligee) require an individual (principal) to get a bond before they can receive their license to operate or perform a job. Individuals pay a fee (referred to as a premium), typically on an annual basis, to retain a bond from a bond company (surety).
Consumers may file a claim with the surety against a principal's bond if the individual fails to adhere to government-enforced regulations or violates the terms of the bond agreement. If the surety deems the claim valid, they will compensate the consumer up to the amount the principal is bonded for and will seek reimbursement from the principal for the amount they distributed to settle the claim.
License & Permit Bonds
License and permit bonds are typically required before you can get your business license to operate. These bond types are also referred to as commercial bonds or business bonds.
Examples of license and permit surety bonds include auto dealer bonds, mortgage broker bonds, and collection agency bonds.
Contractor License Bond
A contractor license bond is required for contractors seeking their business license. The premium for a contractor license bond is typically below 1% of the total coverage amount, depending on your state. For example, New Jersey contractors can expect to pay 0.5% of the bond amount while Washington contractors pay 0.9% of the liability amount.
Get your contractor license bond online.
Plumbing Contractor Bond
A plumbing contractor bond is required for plumbers to legally perform their services. It's a guarantee that your work will be done with professionalism and quality. With this type of bond, you can be held liable if your work fails due to faulty materials. Plumbers are required to be bonded in Illinois, Iowa, Minnesota, New Jersey, and Washington D.C.
Annual costs for a plumbing contractor bond can range from less than 1% to 10% of the total policy amount.
Learn more about plumbing contractor bonds.
Home Improvement Contractor Bond
Home improvement contractor bonds are required for contractors before they can take on projects that involve the construction or remodeling of residential land. This bond type serves as a guarantee to consumers that your work will be up to code and meet state regulations.
This type of construction bond allows homeowners to file a claim should your work fall short of industry standards or fail to meet their expectations.
Premiums for home improvement contractor bonds range from 1% to 5% of the bond’s full amount.
Get bonded as a home improvement contractor.
Process Server Bond
A process server bond is required for individuals who deliver legal documents to a defendant in a court case. It's a legal contract that holds you accountable for any damages to a plaintiff. In your role as a process server, you're required to obey all state rules and regulations while carrying out your tasks.
There are several states that require process servers to get bonded before they can receive their license. Those states include California, Florida, and New York. The premium for a process server bond is typically a small fraction of the bond’s coverage amount.
Receive your process server surety bond.
Legal Document Assistant Bond
A legal document assistant (LDA) bond is required if you prepare legal documents for a client. Other names for this policy type include paralegal bond and document preparation service bond. LDAs working in California and document preparers in Nevada are required to get bonded to comply with government laws.
Bond amounts and premium costs vary based on your state. For example, Nevada requires such professionals to maintain a $50,000 bond, which is available for a premium of $400 per year.
Auto Dealer Bond
Auto dealer bonds are required by the Department of Motor Vehicles for dealerships involved in selling, buying, or trading vehicles for sale or resale. Also known as motor vehicle bonds or MVD bonds, they’re designed to protect consumers from fraud or wrongdoing on your end.
Market rate for the premium of an auto dealer surety bond is usually 1% of the bond amount required in your state.
Get a bond for your auto dealership.
Mortgage Broker Bond
A mortgage broker bond is required for mortgage brokers, or mortgage loan originators (MLO), to receive their license. Mortgage brokers in Illinois may know the bond as a residential mortgage license bond.
This type of license bond is a guarantee you will run your brokerage business with honesty, integrity, and professionalism. It also serves to protect borrowers from financial loss should you engage in illegal activities.
The premium for mortgage broker bonds is 0.6% of the total policy amount.
See details about mortgage broker bonds.
Collection Agency Bond
A collection agency bond is required by state governments for agencies looking to make a profit when collecting outstanding debt for their clients. Debt collectors are hired to retrieve debt payments from a company or individual and return that money to the client.
Also known as a debt collector bond or collection agency licensee surety bond in Maryland, this type of policy is a guarantee you will refrain from unethical and illegal practices when collecting debt.
Prices for collection agency bonds vary by state, but premiums generally range from $100 to $500 per year. These premiums cover bond amounts ranging from $5,000 to $50,000.
Get a quote for your collection agency bond.
Contract Bonds
A contract bond, also referred to as a performance and payment bond, protects investors and principal owners of a project from incomplete work or unpaid expenses. If you fail to complete the project accordingly, the surety company may be forced to pay a default judgment and take over the construction management of the project.
Performance and payment bonds are common types of construction bonds, but there are also bid bonds, credit only qualification bonds, and grading bonds.
Bid Bonds
A bid bond is required of contractors bidding on public works projects. This type of construction bond ensures financial compensation should the contractor default and the project must be re-bid. Bid bonds are issued at no cost to the contractor.
Apply for your bid bond today.
Performance Bond – Credit Only Qualification Bonds
Credit only qualification bonds allow contractors to get bonded without the need for financial statements, tax returns, and detailed underwriting. To be eligible for credit only performance bonds, contracts must be under $1,000,000 in size and you must have a strong credit history. The cost of a credit only qualification bond is 3% of the bond amount.
Learn more about credit only qualification bonds.
Grading Bonds
A grading bond is required of contractors to move an amount of earth that exceeds the city or county limits. Also referred to as grading permit bonds or excavation contractor bonds, these bonds can cost as low as 0.875% of the bond amount.
Get a free bond quote for your grading project.
Court Bonds
Court bonds are the fourth type of surety bond you should be aware of. These bonds are for individuals involved in court proceedings, and they protect consumers from litigation fees and financial loss. Common types of court surety bonds include probate bonds, appeal bonds, and trustee bonds.
Probate Bonds
A probate bond is required for appointed administrators, executors, guardians, and trustees. Also known as fiduciary bonds or estate bonds, probate bonds are a guarantee you will carry out your duties legally and ethically.
The cost of this court bond type varies based on the estate’s value for which you’re responsible. At the very minimum, expect to pay at least 0.5% of the surety bond amount.
Get a probate bond for an estate.
Appeal Bonds
An appeal bond is required by both federal and state courts for defendants who lose a case and want to appeal to a higher court. This type of court bond guarantees you will provide payment for the original judgment.
Also known as supersedeas bonds, the cost of appeal bonds typically average around 1%. In addition to the premium, you will also need to pay the fees and interests during the appeal up to a certain amount and provide collateral in the bond’s full penal sum.
Trustee Bonds
Trustee bonds are required by the court for individuals who are appointed as trustees. A trustee’s responsibilities include managing property and assets within a trust and distributing them to the appropriate beneficiaries accordingly. This type of court bond is designed to protect consumers from potential loss.
A judge determines trustee bond costs, and premiums are typically a small percentage of the coverage amount.
Fidelity Bonds
Fidelity bonds serve as insurance for businesses in the banking, finance, and insurance industries. This business insurance policy helps organizations recoup any financial loss from the fraudulent or dishonest actions of an employee. Fidelity bonds, ERISA bonds, and third party administrator bonds are a few types of fidelity bonds.
Fidelity Bonds
A fidelity bond is a type of insurance that protects your business against financial or physical loss by employee fraud, theft, or other misconduct. Fidelity bonds are a great risk management tool and can be purchased for only 1-3% of the bond amount.
Learn more about fidelity bonds.
ERISA Bonds
An ERISA bond, also known as a 401(k) fidelity bond, is required of any business that offers an employee benefits plan unless exempt. Anyone involved in the management of assets for employees must each have a bond with coverage of at least 10% of the assets they handled in the previous year.
The premium for an ERISA bond is on average about 1% of the liability amount for a three-year term.
Third Party Administrator Bonds
A third party administrator bond is required of businesses that handle administrative tasks for organizations. Many states require third party administrators to be bonded as part of the licensing process. The premium of a third party administrator bond can range between 1-15% of the bond amount.
Get a free third party administrator bond quote.
Get the Right Bond for Your Business
The purpose of surety bonds is to protect the public. However, they also add credibility to your work and provide consumers peace of mind as you complete the job.
To get the right kind of bond for your business, contact NNA Surety Bonds for a free quote. As one of the nation's largest producing surety bond agencies, we have relationships with multiple carriers to get you the best rate.
Now that you understand the different types of bonds available, learn how to get a surety bond for your business.