How surety bonds work

A surety bond is a three-party guarantee

The obligee (a state, court, or counterparty) requires the principal (you) to obtain a bond as a condition of doing business or performing an obligation. The surety (the bonding carrier) guarantees the obligation. If the principal fails, the surety pays the obligee, then collects from the principal.

It is not insurance

Insurance protects the buyer. A surety bond protects the obligee from the buyer. The premium you pay is not pre-funding losses; it is a fee for the surety lending its credit. If a claim is paid on your bond, the indemnity agreement obligates you to reimburse the surety.

Pricing is credit-driven

• Standard market premium runs 1 to 3 percent of bond amount for personal credit above 650.
• Substandard or bad-credit programs run 3 to 10 percent.
• Bond amount is set by the obligee. You do not pick it.
• Some commercial and notary bonds are flat-rate, regardless of credit.

Underwriting, briefly

Small license, permit, and notary bonds usually need only a short application and a credit check. Contract bonds, large license bonds, and court bonds need a full underwriting package: financials, work in progress, references, and personal financial statements for owners with 10 percent or greater interest.