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At Nationwide, our mission is to protect what matters with extraordinary care. That’s where bonds come in.

According to the Surety & Fidelity Association of America, surety bonds provide the most comprehensive risk management tool available to protect against default and ensure contractual obligations are met.1 Different kinds of surety bonds provide coverage to ensure compliance with local, state or federal requirements, guarantee tax or other financial obligations, or guarantee performance of an underlying contract.

Continue reading to learn more about the differences between bonds and insurance, the types of bonds, and how to start the bonding process.

What is a surety bond?

A surety bond is simply financial assurance that the work will be completed on time and as promised in a contract, that work will be done in compliance with code or statute, or that performance and fidelity obligations will be met.

Unlike insurance, which is a two-party agreement, there are three parties involved in surety bonds.

  • The first is the principal who is the party performing the work or agreeing to the obligation. They are responsible for qualifying for and purchasing the surety bond.
  • The second is the surety, which is the carrier that underwrites the risk, issues the bond and ultimately may pay the claim, if warranted.
  • The third is the obligee, which is the government or private entity seeking the protection the bond provides.

For example, in a construction project, the contractor is the principal, the surety carrier provides the financial guarantee, and the obligee (owner) is the third party that is hiring the contractor to perform the work. If the contractor doesn’t fulfill the terms of the contract, the obligee would file a claim with the surety. In turn, the surety would compensate the obligee for any covered losses or arrange to have the contract completed by another contractor.

Bonded vs. insured: What is the difference?

While they may sound similar, bonds and insurance are quite different. Here’s what sets them apart:

  • 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. Bonds are three-party obligations to include the principal, obligee, and surety. Surety bonds are written with no expectation of loss, and premiums generally reflect this.

    Bonds are often required before the obligee signs the contract, allows a business to operate, or grants authority, such as for a fiduciary in a probate estate or public official. And, unlike insurance, the principal is responsible for reimbursing the surety for any claim payment made by the surety through the underlying indemnity agreement.

  • Insurance provides protection for the insured in the event of a covered loss. Insurance is a two-party agreement between the insured and the insurer. Premiums are set to reimburse the insurance carrier for underwriting and loss costs. In the event of a loss, the insured does not reimburse the insurer for any payments received.

What are the types of bonds in business?

There are many kinds of bonds available to a wide variety of business and individuals. Common bonds issued by Sureties are:

  • Construction bonds: This includes bid or proposal bonds, performance bonds, payment or labor and materials bonds, maintenance bonds and supply bonds. These bonds are required by state and federal law for most public construction projects or private developers.2
  • Commercial bonds: Commercial surety bonds protect the public (consumers) against fraud, misrepresentation and financial risk and are typically required by federal courts, government bodies, financial institutions and private corporations as part of a company’s licensing processes.3
  • Fidelity bonds: A fidelity bond is a kind of insurance that protects employers from losses that result from dishonest actions of employees, such as fraud. If an employee does something deceitful that causes damages for the business, the business then files a claim with the surety to get reimbursed for covered losses.
  • License and permit bonds: These consist of any bond required by state law, municipal ordinance, regulation, and in some instances, the federal government or its agencies, to obtain a license to engage in a particular business or a permit to exercise a particular privilege. Bonds in this category include Contractors’ License Bonds, Motor Vehicle Dealer Bonds, Employment Agency Bonds, Health Spa Bonds, Grain Warehouse Bonds, Liquor Bonds, Cigarette Tax Bonds, and Sales Tax Bonds.3Court bonds - Judicial: This type of bond is required when litigants seek to avail themselves of privileges or remedies that are allowed by law only upon condition that a bond with surety be furnished for the protection of the opposing litigant or other interested party.3
  • Court Bonds - Fiduciary: This type of bond is given by a Court Fiduciary to secure the faithful performance of fiduciaries’ duties and compliance with the orders of the court having jurisdiction, including, for example, bonds for Executors, Guardians, and Trustees Under Will.
  • Public official bonds: These bonds guarantee the faithful performance of duty by a public official in a position of trust, such as Tax Collectors, Sheriffs, Judges, Court Clerks, and Notaries. They are required to secure compliance with federal or state statutes and, therefore, guarantee whatever liability the statute imposes.3
 

There are many other specialized bonds available to businesses and individuals across different industries and fields.

How to get bonded

If you are seeking to purchase a bond, it’s important to work through a trusted bond professional. Bonds are available through a licensed surety broker or insurance agent.

Different bonds have different terms, so be sure to review your bond carefully so you understand the renewal process and the documentation necessary for cancellation.

Pricing for bonds varies, too, and is based on the type of bond, credit history, and other factors. To learn more about pricing for a specific bond, talk to a surety professional.

In the end, it’s important for individuals and businesses to understand what a bond is, what types of bonds are available, and how the bonding process works so you can ensure you are in full compliance. Doing so can build trust and credibility, mitigate risk, and provide financial security.

Looking for more information? Visit Nationwide’s Surety product page.

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Are you a Nationwide® agent looking for a surety underwriter?
Go to Agent Center, select Products (top left), then scroll to Surety & fidelity bonds.

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.