How does a surety bond work?

A: Surety Bonds are a standard practice in many areas of contracting and construction. When you sign up for a new construction permit or renew your license, you'll usually need to get a surety bond.

A surety bond is typically sold through an insurance company (if you need a quote on a bond, contact our agents), but the bond is actually an agreement, not an insurance policy.

When you have a bond, the insurance company agrees to pay damages to a third party if you fail to deliver something. In return, you agree to repay the insurer. In essence, these bonds provide a way for small-business contractors to offer financial guarantees.

What kind of surety bond does a contractor or construction business need?

One common surety bond for contractors is a License or Permit Bond. When you apply for a building permit or contractor's license, you'll need this bond, which offers a financial guarantee to the government office that licenses you.

For example, say you need a $25,000 bond to have a contractor's license in your state. If you make a mistake on a job, the client could sue the government office that licensed you. If that happens, the insurer pays the bond amount (up to $25,000) to the state government. According to the bonding terms, you'll have to repay the insurer later.

Because local governments can be sued for licensing you, they want a guarantee that you know — and will follow — proper building regulations. That's what your bond is.

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