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Surety bonds provide consumers with protection knowing that bonded businesses must operate with integrity, honesty and fidelity. That’s because surety bonds guarantee the financial responsibility of the bonded principal and ensure they operate in compliance with local, state and federal requirements.

What is a surety bond?

A surety bond is simply a guarantee that one party will fulfill its contractual and financial obligations to another party. Bonds are three-party obligations that include:

  • A principal, which is the individual or business providing the product or service.
  • An obligee, which is the party requiring the bond before allowing the business to operate.
  • A surety, which provides the financial guarantee should the principal fail to perform. 

Surety bond vs. insurance

It’s important to understand the distinction between surety bonds and insurance.

  • Surety bonds provide protection to the obligee in the event the principal does not comply with or fulfill the obligations agreed to in the bond. Surety bonds are written with no expectation of loss, and premiums generally reflect this. If a claim is made against the bond, the principal is responsible for reimbursing the surety, though pursuit of reimbursement is rarely successful.
  • Insurance provides protection for the insured in the event of a covered loss. Insurance is a two-party agreement between the insurer and the insured. Premiums are set to reimburse the insurance carrier for underwriting and loss costs. In the event of a loss, the insured is not expected to reimburse the insurer for any payments received. 

There are many benefits to being bonded. A surety bond offers an added layer of protection for the obligee by providing them with the guarantee they won’t suffer a financial loss if the principal fails to fulfill its contractual obligations. This provides reassurance to consumers who know that non-qualifying businesses have been excluded through the surety underwriting screening process. [1]

How does a surety bond work?

A surety bond is a guarantee that a party called the principal will fulfill its contractual and financial obligations to another party called the obligee. If the principal doesn’t honor its promise, the obligee will file a claim against the surety bond. 

The party that issued the surety bond, called a guarantor, will fulfill the financial obligations on the principal’s behalf. The principal is then endebted to the guarantor and must reimburse them for any claims it paid.

Types of surety bonds

There are many kind of businsses that may be required to purchase a surety bond to provide consumer protection. It’s important to work with a surety professional to determine which bonds you may need to purchase to operate in varying jurisdictions and prior to entering into certain contracts.

Contract surety bonds

Contract surety bonds are designed to protect construction projects and funding. They ensure that the principal will complete the project within the agreed-upon timeframe and budget. [2]

Commercial surety bonds

Commercial surety bonds provide protection against financial loss to both government entities and consumers. They ensure the business will operate according to local ordinance, state statute or federal code. 

Court/Fiduciary bonds

Court/fiduciary bonds, which may be required during official court proceedings, are designed to ensure that parties responsible for performing certain mandated duties, such as distributing funds to beneficiaries, fulfill their obligations faithfully.  

Fidelity bonds

Fidelity bonds protect businesses and potentially their customers from dishonest acts by their employees. 

How to obtain surety bonding.

It’s important to seek to work with a surety professional / surety agent when assessing your need fora surety bond. A surety expert can ask the right questions to guide you to the right bond for your specific needs. 

Pay special attention to the terms of the bond requirement, including the name of the party or government entity requiring the bond,  the bond amount needed, along with the guarantees the bond should provide. Also, it’s important to understand that while the principal pays the surety for the bond, the primary beneficiary of the bond is the public or owner who is protected by the bond.  In addition, the principal must also reimburse the surety for any claims the surety pays to cover a surety claim. [6]

Work with a surety professional to understand how bonds work, the nuances of different bond options, the contrasting roles bonds and insurance play, and how to get the protection you need. 

Learn more about Nationwide’s surety bond options here.
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Surety resources

[1] “Benefits of Being Bonded and Insured,” https://www.forbes.com/advisor/business-insurance/bonded-and-insured/ (accessed August 2024).
[2] “How Do Surety Bonds Work,” https://learn.aiacontracts.com/articles/understanding-surety-bonds-a-comprehensive-guide/ (accessed August 2024).

The information included here is designed for informational purposes only. Nationwide does not guarantee the accuracy or timeliness of the information contained herein. It is not legal, tax, financial or any other sort of advice, nor is it a substitute for such advice. The information may not apply to the reader’s specific situation. It is the reader’s responsibility to comply with any applicable local, state or federal regulations. Nationwide Mutual Insurance Company, its affiliates and their employees make no warranties about the information nor guarantee of results, and they assume no liability in connection with the information provided.