Why Your Business Needs a Surety Bond

Do you plan to do work with a government agency in the future? Does your business calendar include appointments to bid on construction jobs? If so, you’ll likely need a surety bond to be seriously considered for employment. 

Surety bonds are a safeguard, and exist to assert confidence that your business will finish what it starts. They are required in multiple instances and across multiple sectors. Let’s talk more about them.

What is a surety bond? 

A surety bond is a promise backed by capital. This promise asserts that contract terms will be met by all parties, that agreements will be kept, and that all sides comply with the contract. 

Think of a surety bond as a handshake that holds legal weight. You or your business agree to complete a scope of work, and the entity employing you can have full confidence that this will happen. If it is not, recompense will be given to the slighted party.

The 3 parties of a surety bond

To understand how a surety bond works, you must first understand that each bond involves three parties. These are:

The Principal 

Often the owner of a small business, this bond purchaser opts to obtain a surety bond in order to enter a contract bid or do work. 

The Obligee 

If you require a surety bond, that means you’re the obligee. Obligees are commonly government agencies, but anyone looking for a solid guarantee of job completion can be one. 

The Surety

Someone has to guarantee this bond, and that is the surety, or insurance company. Think of them as the middleman: if the Principal neglects to hold up their end of the bargain, the surety steps in to remedy the situation. Completing the work is the overall aim, and the insurance company covers this as stated in the bond.

What do the terms licensed, bonded and insured mean?

These three terms are ‘the mighty three.’ A company that can list this trio has completed the triumvirate of items necessary to inspire ultimate consumer confidence. 

While a business can separately earn the designations of licensed, bonded and insured, there is a significant difference among the terms.


This is the bare bones, must-have designation for many industries. A company that is licensed meets some minimal guidelines for its sector. For example, it would be inadvisable to have an unlicensed stylist to cut your hair. The license hanging on the salon wall gives you confidence that the person holding the shears has completed some training as required by a licensing board.


A company that says it is ‘bonded’ is simply sharing the information that a surety bond has been purchased to protect third parties doing business with it. If the agreed-upon project work is not completed, a claim can be filed for recompense.


A synonym phrase for insured is ‘transfer of risk,’ and that’s exactly what insurance does for a business.  An insured business commonly carries protection for workers compensation and general liability, though more coverage is available. Construction companies likely hold builders’ risk policies and property insurance as well.

What are the 4 types of contract surety bonds?

Bid bond 

Seen in the construction space, a bid bond guarantees that if a bid submitted by the contractor is accepted, that contractor will be entering a contract that involves an agreement of doing the work at the price given

Performance bond

An insurance company or bank stands behind a contractor in this situation, ensuring that a project is completed in a satisfactory manner. 

Payment bond 

A contractor opts for a payment bond, which is a surety bond that ensures subcontractors and those supplying materials are paid. Payment bonds are commonly seen alongside performance bonds.

Warranty bond 

This type of bond has an expiration date – consider it a limited warranty situation. Once that predetermined date has passed, the bond is no longer valid and active.

5 types of commercial surety bonds

License and permit bonds

Before you even apply for a permit or license in some instances, these bonds will be required. They act as a safeguard that the individual or business that obtained the license and/or bond will comply with applicable regulations and laws and that it can actually do what the license or permit details. This requirement discourages businesses that may not be completely able to perform the assigned work from agreeing to undertake it.

Court bonds

Whether one is the defendant or the plaintiff, it may be necessary to get a court bond. Included under the ‘court bond umbrella’ are the well-known bail bond, but bonds for appeal, attachment, replevin and injunction are available as well. 

Fiduciary/probate bonds

A surety bond, this type protects creditors, heirs and beneficiaries in the scenario of a trust. 

Public official bonds

If you hold a public office, you’ll likely be required to have a public official bond. These are designed to protect the public if the official does not perform as they are supposed to. It’s interesting to note the wide range of public officials who require surety bonds, including, but not limited to: treasurers, tax collectors, judges and more.


Bonds can be personalized for nearly any situation. These fall under the category of miscellaneous, and do not fully comply with the already-mentioned common bonds. 

4 industries that need surety bonds

Auto dealers

Ever wonder why more lemons aren’t sold by well-known auto dealers? Surety bonds knows as auto bonds are a failsafe to make sure that auto dealers do not engage in fraudulent behavior. If the dealer lies about a vehicle’s age or condition or engages in another misleading claim, this surety bond protects the consumer. 

Construction contractors

If a construction contractor breaks laws and does not honor their contracts, a penalty 

lies ahead for them. That’s thanks to a contractor bond, whether residential, commercial or other. 

Financially responsible officer bond

Ethics is the name of the surety bond game here. A company’s FRO (financially responsible officer) is thus guaranteed to act becoming to a high standard. These bonds aren’t widely required. 

Healthcare providers

By now, you’ve likely learned that bonds ensure that an entity fulfills its contractual obligations. This is the same for healthcare providers, who may opt for a surety bond over an LOC (letter of credit). 

How much do surety bonds cost?

A variety of components factor into the answer to that question, including credit rating, industry expertise, riskiness of the undertaking and more. Consider a small construction company bidding for its largest project to date. It may need to pay more for a surety bond than, say, a larger company that has a proven track record of project successes. 

The best way to find out how much a surety bond will cost for your unique situation is to contact a professional, explain the scope of work, and let them do their due diligence.

How do I get a surety bond?

This answer is the most straightforward of all of them in the article: simply call our office at (727) 522-7777 to speak with one of the surety bond advisors at W3 Insurance. 

Whether you’re a Florida small business owner hoping to bid on a federal project or a contractor investigating the types of surety bonds necessary for the future, W3 has extensive surety bond expertise.