Surety & Commercial Bonds

A guarantee to a third party that you will do what you agreed to do. It is not insurance, and it does not behave like insurance.

Who It Is For

Contractors, licensed businesses, public officials and court-appointed fiduciaries.

Nobody buys a bond because they want one. Bonds are bought because a government agency, a project owner, a financial institution or a court requires one before something can proceed.

Contractors and construction companies bidding and performing work for public agencies and private developers.
Businesses that must hold a license or permit bond before the license itself is issued, such as an auto dealership.
Public officials and subdivision developers, where the bond is part of the office or the approval.
Executors, administrators, personal representatives, trustees, guardians, conservators, curators and custodians handling someone else's estate.
Anyone who has lost a cashier's check, money order or stock certificate and needs a replacement issued.

Business owner reviewing surety and commercial bond requirements with Oxford Risk

Bond Overview

A bond protects the party that required it, not the party that pays for it.

Being bonded is different from being insured, because commercial bonds are not technically insurance. A bond is a guarantee among three parties. The principal is the business that buys it and is bound to perform. The obligee is the party requiring the bond and the one that receives any payout. The surety stands behind the obligation. If the principal fails to perform the work it is bound to complete, the obligee is compensated for its financial loss, or is able to bring in another contractor to finish the job.

The difference from insurance shows up after a claim is paid. The surety pays the obligee, then recovers that money from the principal. What the obligee is buying is the assurance that it will not have to chase the money itself. A business can need a bond and insurance at the same time; they answer different questions.

Bonds a business is commonly asked for

Bid bonds and contract bonds.
Performance bonds, payment bonds and maintenance bonds.
License bonds, permit bonds and warranty bonds.
Public official bonds and subdivision bonds.
Fiduciary bonds, probate bonds and court bonds.
Lost instrument bonds, along with a range of other non-contract and miscellaneous bonds.

Contract bonds: bidding the work, then doing it

A bid bond is used almost entirely by contractors and construction businesses. Project developers often require it of everyone bidding, because it guarantees that the contractor is financially sound enough to complete the project and that the bid placed is a serious one.
Bid bonds exist as an answer to a real pattern: contractors bidding low to win the contract, then raising the price once work had started or dropping out of the project altogether, leaving the developer with the problem.
A performance bond follows once the project is awarded. It guarantees that the contractor will complete the project as agreed in the contract, which is how the developer protects the investment already made in it.

License and permit bonds

Many local, state and federal government agencies require a business to obtain a license bond, also called a permit bond, before it can receive the license or permit for its industry.
An auto dealership, for example, may be required to purchase an auto dealer bond before it can begin selling or trading vehicles.
The bond helps protect consumers from fraud or other harm caused by the bonded business. In practice it guarantees that the business will adhere to the governmental regulations required of its industry.

What A Bond Commits You To

The parts that surprise people expecting a bond to behave like a policy.

A bond transfers certainty to the obligee. It does not transfer risk away from you.

You are the one who ultimately pays. The surety that compensates the obligee can and will come after the principal to get that money back. That is the defining difference from ordinary insurance, and anyone treating a bond as a substitute for coverage has the relationship backwards.
No bond, no work. A license bond can be the condition of holding the license at all, and a bid bond the condition of being allowed to bid. These are gating requirements rather than risk transfer, and the deadline usually belongs to somebody else's schedule.
A court bond ends when the court says it ends. Probate and court bonds are generally required of court-appointed fiduciaries and cannot be closed or canceled without a court order, so the obligation runs as long as the appointment does.
The underwriting is about your record. Performance bond rates depend on the bid amount and on the jobs you have already completed. Bonding is built on a track record, which makes it worth establishing before the project you actually need it for.
Figuring out which bond applies is its own problem. Requirements sit at the federal level, the state level, and right down to the city where the work is performed. The bond named in the contract or on the license application is the one that counts, and it is worth having that named in writing before buying anything.

Which bond, in what amount, and by when, are usually decided by whoever is requiring it rather than by you.

Sequence the bonds to the project. A bid bond comes before the award and a performance bond after it. A contractor pursuing public work or developer-led projects needs both in view from the beginning, not one at a time.
On a lost instrument bond, know whether the penalty is fixed or open. Financial institutions often require a lost instrument bond before issuing a replacement for a cashier's check, money order or stock certificate. The bond guarantees that if the original is ever found, you cannot cash it in addition to the duplicate. Fixed penalty bonds are issued for instruments of fixed value, such as checks. Open penalty bonds are for instruments whose value fluctuates, such as stock certificates.
For a fiduciary, the bond is not the whole duty. The bond guarantees the estate is handled properly; it does not make the handling easier. The duties it stands behind, appraising assets accurately, contacting every listed beneficiary, paying the debts of the deceased, are where claims come from.
Expect to carry both bonds and insurance. Your business may have insurance and still need a bond, depending on the type of work you are doing. The bond guarantees performance to the party requiring it. The insurance responds to your own losses and liabilities. Being bonded says nothing about whether you are insured.

Is a bond the same as insurance?

No. Commercial bonds are not technically insurance. Insurance responds to your own loss. A bond is a guarantee to a third party that you will perform, and if the surety has to pay that party, it recovers the money from you afterwards. Many businesses need both, for different reasons.

Why would a court require a bond from an executor?

Because the fiduciary controls someone else's estate and assets. A probate bond is a financial guarantee to the beneficiaries that the estate will be managed and distributed properly, standing behind duties such as filing the will, verifying its validity, appraising the assets, paying debts still owed by the deceased, and locating and paying inheritances. A beneficiary harmed by a failure in those duties can bring a claim.

Can a bond be quoted online?

Many can. Oxford runs an Instant Bond portal through which a number of bond types can be quoted and issued online. Which bonds it handles depends on the type of bond being requested.

How do I know which bond I need?

Usually from whoever is requiring it: the contract, the licensing authority or the court names the bond and the amount. Working out which one applies is often the hardest part, and it is the part worth asking about before the deadline rather than after.

More Coverage

Other business insurance we place

View all business insurance →

Next Step

Let's put the right policy in place.

Oxford Risk LLC is an independent agency. We represent you rather than a single carrier, which means we can place your coverage with the company whose appetite actually fits your risk. Tell us what you need to protect and an advisor will take it from there.

Call (330) 315-3081
Hours Monday - Friday: 8:00 AM - 4:00 PM
Offices Fairlawn, OH, Cranberry Township, PA, Columbus, OH, Livonia, MI

Get a Quote