Understanding the Misconceptions Around Surety Bonds
Surety bonds are an essential part of many industries, from construction to finance to professional licensing. Despite their widespread use, they remain one of the most misunderstood financial instruments. Business owners, contractors, and individuals often confuse them with insurance or assume they’re costly and difficult to obtain.
These misconceptions can lead to missed opportunities or compliance issues. In this guide, we’ll address 12 of the most common surety bond myths, clarify how surety bonds work, and explain why understanding them correctly can benefit your business or profession.
Myth #1: Surety Bonds Are the Same as Insurance
One of the biggest misconceptions about surety bonds is that they function like traditional insurance. While both involve risk and protection, they are fundamentally different.
Insurance protects the policyholder (the insured), whereas a surety bond protects a third party known as the obligee. In a surety bond agreement, there are three parties involved:
- Principal: The person or business required to obtain the bond.
- Obligee: The entity requiring the bond, often a government agency or project owner.
- Surety: The company that issues the bond and guarantees the principal’s performance.
If the principal fails to meet their obligations, the surety pays the obligee for losses but then seeks reimbursement from the principal. This means the risk ultimately rests on the bondholder, not the surety company.
Myth #2: Only Large Companies Need Surety Bonds
Surety bonds aren’t limited to large corporations or public contractors. In fact, small businesses and individual professionals often need them to comply with licensing laws.
Common examples include:
- Auto dealers applying for a state license.
- Notaries obtaining notary bonds.
- Freight brokers maintaining federal compliance.
- Contractors bidding on smaller public projects.
Surety bonds provide accountability and financial protection for clients and the public, regardless of a business’s size.
Myth #3: Getting Bonded Is Slow and Complicated
Many people assume the bonding process involves mountains of paperwork and lengthy approval times. While that may have been true years ago, today’s technology has made bonding faster and simpler than ever.
For most license and permit bonds, applicants can complete the entire process online in minutes. Digital forms, instant quotes, and electronic signatures have replaced manual applications. Only certain high-risk or high-value bonds—such as large performance bonds—still require detailed financial underwriting.
For most business owners, obtaining a bond is now as straightforward as filling out an online form and paying a small premium.
Myth #4: Bond Premiums Are Extremely High
Another common misconception is that surety bonds cost thousands of dollars upfront. In reality, the premium (the amount you pay) is only a small percentage of the bond’s total value.
For example, a $50,000 bond doesn’t cost $50,000. Depending on the applicant’s credit and risk profile, the annual premium may be between 1% and 10% of the bond amount.
That means a typical $50,000 bond might cost $500 to $2,000 per year. Premiums vary based on factors like credit history, industry type, and the amount of financial risk involved—but they are far more affordable than many people expect.
Myth #5: Bad Credit Means You Can’t Get Bonded
While credit history does affect bond pricing, poor credit does not automatically disqualify someone from getting bonded. Many surety providers offer programs for applicants with lower credit scores or limited financial history.
The rate may be higher, but approval is still possible. Some bond types—such as notary or smaller license bonds—don’t even require a credit check.
As long as the applicant is transparent about their background and financial situation, they can usually secure the bond they need. Over time, maintaining good payment history and financial stability can also help reduce renewal rates.
Myth #6: Surety Bonds Protect the Business Owner
It’s easy to assume that purchasing a surety bond protects the principal, but that’s not the case. Surety bonds are designed to protect the obligee—the entity requiring the bond—not the person or business buying it.
If a claim is filed against the bond and proven valid, the surety will pay the obligee up to the bond amount. However, the principal must repay the surety in full, including any associated costs or legal fees.
Surety bonds act as a financial guarantee of honesty and performance, not as an insurance policy for the principal.
Myth #7: You Only Need to Get Bonded Once
Many professionals believe that once they’ve purchased a bond, they’re covered indefinitely. In reality, most surety bonds are issued for a fixed term—typically one year—and must be renewed to remain active.
Failing to renew a bond can result in penalties, license suspension, or contract termination. Renewing ensures continuous compliance with state or federal regulations.
While renewals may involve a quick credit check or updated information, the process is generally straightforward, and many bonds automatically renew each year.
Myth #8: Bonds Are Only for Construction Companies
Although construction bonds are among the most recognized, they represent just one category of surety bonds.
Surety bonds are used across a wide range of industries, including:
- Real estate and mortgage services.
- Auto dealerships.
- Freight brokerage and logistics.
- Insurance and finance.
- Public notaries.
- Healthcare and education providers.
Each bond type guarantees compliance with specific laws, contract terms, or fiduciary duties—meaning almost any regulated industry can require them.
Myth #9: If a Claim Happens, the Surety Pays and That’s It
This myth often causes the most confusion. When a claim is filed against a bond, the surety investigates to determine if the principal failed to meet their obligation. If the claim is valid, the surety compensates the obligee—but that’s not the end of the story.
The principal is still legally responsible for reimbursing the surety in full. The bond serves as a form of credit, not insurance coverage.
Because of this repayment obligation, claims can have significant financial and reputational consequences for the principal, making it critical to fulfill all bonded obligations.
Myth #10: One Bond Covers All States and Obligations
Surety bonds are specific to the jurisdiction and type of obligation they guarantee. A bond obtained in one state may not be valid in another, even for the same industry.
For example, an auto dealer licensed in Florida must secure a Florida Auto Dealer Bond, while opening a dealership in Texas would require a separate Texas Auto Dealer Bond. Each state sets its own bonding requirements, forms, and bond amounts.
Likewise, each bond only covers the specific obligation for which it was issued. Businesses operating across multiple states or under different licenses may need multiple bonds to remain compliant.
Myth #11: All Bonds Offer the Same Coverage
Not all bonds function the same way. Each bond type guarantees a specific obligation and protects a specific party.
For example:
- License and permit bonds ensure compliance with regulations.
- Performance bonds guarantee contract completion.
- Payment bonds ensure subcontractors and suppliers are paid.
- Court bonds secure obligations ordered by a judge.
- Fidelity bonds protect employers against employee dishonesty.
Misunderstanding which bond type is required can result in noncompliance or delays. It’s always important to verify the exact bond form requested by the obligee.
Myth #12: Surety Bonds Are Just Red Tape
Some people see bonding as an unnecessary bureaucratic step. In reality, surety bonds play a critical role in business integrity and consumer protection.
Bonds hold businesses accountable for their actions. They assure regulators and clients that bonded professionals will operate ethically and fulfill their commitments. When something goes wrong, a bond provides a clear financial path to resolve the issue.
Rather than a burden, bonds represent credibility and trustworthiness—qualities that can help businesses stand out in competitive markets.
Conclusion
Surety bonds are often misunderstood, but they’re an essential tool for maintaining trust and compliance across countless industries. The myths surrounding bonding—about cost, complexity, and purpose—often discourage business owners unnecessarily.
In truth, surety bonds are affordable, accessible, and crucial for protecting both the public and legitimate businesses. Understanding how they actually work helps professionals approach bonding with confidence, knowing it’s not just a regulatory formality but a symbol of reliability and responsibility.
