Surety and insurance protect different things
Surety bonds ultimately lead to a better outcome for contractors and consumers
Credit score is by far the most important factor for price
Surety prices vary greatly. So make sure to shop around
Bonds need to be kept up to date
Surety bonds are required in many industries and by government entities. For first-time bond buyers, the process of obtaining a surety bond can be confusing and overwhelming. This article breaks down the important things of surety bonds, including bond application process, surety bond cost, bond requirements, purpose of bonding companies, bonding process, and bond types.
A surety bond is a three-party agreement between a principal (the business owners or individual buying the bond), an obligee (the government organization or project owners requiring a bond), and a surety bond company (the surety provider). A surety bond guarantees fulfillment of contractual obligations, commercial values, or legal compliance. If the principal fails to meet the bond agreement, the surety provider will step in to provide compensation.
Different industries require different bonds. The common types of surety bonds include:
Knowing the right surety bond to obtain from a surety bond company is also important.
Surety and insurance both offer financial protections against risk, but different types of bond protect different parties in a contract.
Buying a surety bond is like having someone promise to pay a third party (usually a bonding company) to supervise the completion of your contractual obligations. The bond premiums and cost serve as both an opportunity cost and a security fund. For example, if you sign a contract to finish a construction project, you can get construction bonds like performance or payment bonds. Performance bond offers financial guarantee for construction projects’ completion and quality. Payment bond guarantees on-time payment to parties participating in any construction projects. After obtaining these contract bonds, the surety bond company will step in if you default or delay payment, dancing bond claims. After providing financial compensation, the surety provider has the right to ask for reimbursement from you. Surety bond requirements are meant to protect project owners or subcontractors, not the principal of the bond agreement.
Insurance, on the other hand, is like buying financial protection against unfortunate events happening to you. Insurance companies pay for any accidental losses you make. For example, car insurance ensures payment of any damages to the car in case of an accident. Clearly, insurance is to protect the principal of the policy.
So, the main difference between surety and insurance is that surety is a promise that you make to someone else with a bonding company, where you are held accountable, while insurance is only between you and the insurance company, where accidents are handled for you.
Apart from regulatory compliance, surety bonds also help foster trust between consumers and business owners. In 2022, the Surety and Fidelity Association of America (SFAA) conducted a study “The Economic Value of Surety Bonds” and found that bonded contractor projects were 2.5 times to 10 times more likely to be completed compared to unbonded projects. The study also found that customers were 5x more likely to believe that their contractor would finish the job on time or ahead of schedule if the contractor was bonded vs. unbonded.
Not only are surety bonds great for consumers, they are also beneficial for businesses, especially small businesses. The same study surveyed 100 construction project owners and found that 97% of them expressed a willingness to pay higher costs for bonded contractors. Breaking down that 97% further, 50% were willing to pay an extra 1%-4% of the construction project and 47% were willing to pay an additional 5%-9% of the construction project!
The price of a surety bond depends on several factors, such as the bond type, the financial health of the applicant’s business, and the bond amount. However, the most significant factor is the principal's credit score and credit history. Surety companies use credit scores to gauge how likely an applicant will default on their bond if a claim were to happen. A bad credit in credit history would lead to higher bond premiums.
Here's a table illustrating the typical relationship between credit score, the type of bond, and the percentage of the bond amount that needs to be paid as bond premium. For example, if you have a 700 credit score, and wish to purchase a $50,000 auto dealer bond, then the price range you can expect is $250 - $750, which is 0.5% and 1.5% of $50,000 respectively.
| Credit Score | Auto Dealer Bond | Freight Broker Bond |
| 700 | 0.5%-1.5 | 1%-2.5 |
| 650-699 | 0.5%-2.5 | 3.5%-4.5 |
| 600-649 | 2.5%-4.5 | 7.5%-10 |
| 550-599 | 4.5%-7.5 | 10%-12 |
| Under 549 | 7.5%-10 | 12%-15 |
*Note here that freight broker bonds are one of the riskiest surety bonds out there, with the highest cost. Most bonds are more similar to motor vehicle dealer bonds in terms of price. We’ve chosen to showcase the high percentage cost of freight broker bonds to illustrate how bond type can impact the price of a bond.
For applicants with bad credit scores (usually below 579 according to FICO), there is still hope. We understand that not everyone has a perfect financial history, and we partner with adverse market carriers that specialize in providing surety bonds to those with less-than-ideal credit scores. These carriers offer a range of bond solutions, albeit at higher bond premiums, to help businesses meet their bonding requirements.
This is a lesser known fact when it comes to surety, but it’s actually possible to have a co-signer on a surety bond. This can be super useful in situations where an individual’s credit score is lower
If an applicant has a bad credit history or limited financial resources, a cosigner with good credit and financial stability can help convince the surety company that the applicant is worth taking a risk on. In the case of multiple cosigners, a surety company will consider an application using a combined credit score of the co-signers. For example, if John had a credit score of 600 and he applied for a contractor bond with his wife Jane, who has a credit score of 700, then the surety company will assess their bond application at a credit score of (700 +600) / 2 = 650. This would result in a better price compared to if John had applied for the bond on his own.
However, it's important to note that being a cosigner on a surety bond comes with its own set of risks. If the principal fails to fulfill their obligations and the bond is paid out, the cosigner will be responsible for repaying the full amount of the bond. This can have serious financial consequences, so it's important for a cosigner to carefully consider the risks before agreeing to cosign a surety bond.
In our experience, surety bond prices from carriers vary widely, depending on the bond and carrier. Therefore, it’s important for you as an applicant to shop around and ask for a few quotes before purchasing. The reason for this is because different carriers specialize in different bonds and different segments. For example, for the California contractor license bond, we’ve found that CNA Surety has the best prices for applicants between 600 and 650, whereas Hudson Surety has the best prices for applicants above 650.
At SuretyNow, we’ve put in a lot of work to figure out which carrier has the best prices for which bond at which credit score range. We also look for quotes from 10+ surety carriers before sending you the most affordable quotes. If you bond with us, you can be rest assured with the most affordable price in the market . If you find a better quote from another company, let us know and we’ll match it. We keep our cost low so we can provide you with the most affordable bond.
Bonds need to be kept up to date for compliance reasons. Here is a list of the most common changes to a business that also need to be updated for a bond:
Changes are made via a bond rider form that needs to be officially filed with the surety company. Some brokers take care of this, some do not. If you bond with us and need this change to be made, give us an email or call and we’ll take care of it.
Yes, financing is often available for surety bonds, but they often cost extra. Many bonding companies offer financing options to make it easier for individuals or businesses to obtain the bond they need. Financing options usually take the form of installment payment plans, which allow the bond premium to be paid in multiple payments over a set period of time. For example, one of our carriers offers a $50,000 California auto dealer bond at an annual price of $375, or a monthly price of $38 (comes out to $456 annually).
Financing options for surety bonds may vary depending on the bonding company and the type of bond needed. Some factors that may affect financing options include the amount of the bond, the creditworthiness of the principal and the cosigner (if applicable), and the purpose of the bond. Generally, surety bonds are not that expensive relative to insurance, so we recommend that customers purchase bonds up front. However, if you require financing, send us an email and we’ll check to see what financing options are available for you.
Here’s another important distinction between surety bonds and insurance. If a claim is made on your bond and the surety company deems that the claim is valid, they will pay out the claim first, but then seek repayment from you, the principal. The amount to be repaid includes not only the claim amount, but also any fees or costs associated with validating the bond claim.
For example, if a California contractor fails to complete a job that causes damage of $30,000, the customer can make a claim on the contractor’s surety bond. The surety company that issued the bond would look into the claim, and let’s say that they deem it valid. The surety company would then pay out $25,000 to the customer, since $25,000 is the bond amount for a CA contractor bond. Remember, the maximum amount that will be paid out to claims is the bond amount that was purchased. In this case, the customer gets paid the maximum amount ($25,000) but it doesn’t fully cover their losses ($30,000). The surety company would then seek repayment from the contractor ($25,000), plus any costs associated with investigating the claim. If the contractor chooses not to repay the surety company, the surety company will cancel the contractor’s bond, and the contractor will lose their license.
In some cases, the premium paid for a surety bond may be tax-deductible. This largely depends on if the surety bond was purchased for business purposes, such as to obtain a license or permit, or to guarantee performance of a contract. For such purposes, the premium can be deemed a business expense and is tax deductible. However, if the bond is required for personal purposes, such as to secure a bail bond, then the premium is not tax-deductible.
It's important to note that the rules regarding tax deductions for surety bonds can be complex, and may vary depending on the specific situation. It's always a good idea to consult with a tax professional to determine whether a surety bond premium is tax-deductible in a particular situation.
