Classifications of Surety Bonds

Contractors working sticks and bricks construction projects typically require a contract bond. The size of the project can greatly range in size. There are smaller projects, such as a subdivision, and larger projects, such as a bridge, skyscraper or coliseum. Basically, sticks and bricks projects fall under the “contract” category in the surety industry.

If you look at a pie chart made up of different types of insurance policies, you’ll see surety only makes up a tiny portion of the pie. When isolating that surety piece, you see commercial type bonds far surpass the number of contract type bonds. However, the large majority of premium comes from contract bonds.

cranes next to skyscrapers
Generally, large construction projects require performance surety bonds.

Contract bond amounts can be set in the millions of dollars or more. Resulting in tens of thousands of dollars in premium for the surety. To stay in business, these contractors constantly pick up new jobs and opportunities, which typically require a surety bond. So, surety companies actively look to make and build relationships with these contractors.

Many construction projects require bonds due to the federal government’s Miller Act (40 U.S.C.Section 3131 to 3134). A payment or performance bond is required if a contract exceeds $100,000 when starting to work on property of the United States. Making contract bonds a sought after line of business for surety companies.

Commercial Bonds (License & Permit)

The majority of bond types available fall under commercial bonds. Generally, these types of bonds function as a guarantee you will obey the terms of a contract agreement. For example, by purchasing a certificate of lost title bond, you are guaranteeing to the state the vehicle you are registering belongs to you and is not stolen.

Another example of a commercial bond is a contractor license bond. This bond type is a typical requirement of a state’s licensing board when a contractor applies for their license. The contractor is promising they will adhere to the professional guidelines and rules per state statutes relative to their license type.

A mortgage bond is a typical requirement for an entity performing mortgage related activities. Mortgage loan officers and loan originators purchase a bond to ensure they follow their stat’s statures, guidelines and provisions when conducting their business. If the licensed and bonded mortgaged professional doesn’t conduct their business honestly and ethically, the injured party financially recovers through the surety.

Court bonds are split into two categories. These two bond categories are judicial and fiduciary (probate).

Judicial Bonds

Appeal bonds and temporary restraining order (TRO) bonds fall under the judicial bond category. These types of bonds carry a higher level of risk and therefore require collateral. As the principal of the bond, you can put up assets or funds (in the form of a letter of credit or cash) to use as collateral with the surety company. But, the downside to posting collateral is it’s difficult to get back.

The surety wants to hold onto the collateral until there is no more risk associated with your bond. Releasing your bond too soon doesn’t benefit the surety. Once your bond expires and your project or agreement ends with the obligee, there is still a period of time after when someone can make a claim against your bond. The surety wants to hold onto the collateral for as long as that risk of a claim still exists.

Fiduciary (Probate) Bonds

The other type of court bond is fiduciary in nature. Guardianship and personal representative bonds fall under this category. These types of bonds are generally ordered by the court.

If you are assigned to be an executor of an estate after a loved one passes away, a fiduciary bond ensures you conduct all business related to the estate according to the will. Or, according to the court if a will wasn’t left behind. Whereas a guardianship bond is necessary if a minor or an adult unable to care for themselves is assigned to you.

Public Official Bonds

If you’re in public office and have a fiduciary role, meaning you have a fiscal responsibility with the constituents (such as a treasury), you may need a bond. What the bond does is protect the assets you steward. So, if a valid claim is made against your public official bond due a financial loss you’re personally responsible for as the treasurer, the surety will payout up to the full bond amount to the claimant. leaving you with the responsibility to repay back the surety company in full.

public official signing paperwork
A surety bond is a common reequipment for public officials.

Conclusion: There are many different classifications of bond types.

From contract bonds to commercial bonds and court bonds; there are many different types of classifications when it comes to surety bonds. If you have been instructed to get a surety bond, but are unsure of the type of bond you need; the best course of action is to contact the entity requiring the bond of you to request a copy of the bond form. By providing the surety company with a copy of the bond form, you ensure they quote you for the correct bond type.

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Beau Chipman

Beau is the Marketing Content Developer at Surety Solutions, A Gallagher Company. He creates content about all types of surety bonds, including mortgage, court, lost title, contractor, fidelity, ERISA and many more.

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