Surety Bonds

Not quite sure what a “surety bond” is? You’re not alone.

Many people don’t know what a surety bond is or why they might need one. Here’s an overview that will walk you through the basics.

Surety Bonds in Focus

What Are Surety Bonds?

Put simply, surety bonds are a kind of guarantee.

When a contractor (principal) does work for a buyer (obligee) a surety bond guarantees the work job will be done in accordance with legal and contractual obligations.

A principal who is not satisfied with the job can file a claim. If the claim is deemed valid, the surety will pay the principal.

The surety will then collect the money from the obligee to cover the full cost of the payout. This repayment is one way a surety bond differs from other types of insurance.

Major Types of Surety Bonds

One of the most common reasons a company needs a surety bond is to work on a public construction project. The requirements are usually determined by the local city or municipality where the work is performed.

However there are many other cases where surety and bonds are required, and a myriad of different types. Here is a summary of the most common by category:

License & Permit
  • Auto Dealer Bonds
  • Contractor Bonds
  • Freight Broker Bond
  • Construction Bonds

Performance Bonds
  • Supply Bonds
  • Maintenance Bonds

Commercial Bonds
  • Janitorial Service Bonds
  • Utility Bonds
  • Lottery Bonds
  • Sales Tax Bonds
  • Business Service Bonds

Court Bonds
  • Probate Bonds
  • Executor Bonds
  • Guardianship Bonds
The types and amounts of a surety bond are usually specified in a bid request or contract. Legal and licensing requirements may also determine the surety bond type and amount.

Cost of Surety Bonds

There is no simple answer regarding what a surety bond costs. This is because there are several variables.

First, there are variables associated with the bond itself. Such as the bond type, amount, term, and risk.

The financial credibility of the applicant (principal) is the other side of the coin. The surety company will consider factors associated with financial credibility.

Factors such as credit score, work history, references, and the professional reputation of the principal.

In a scenario where the surety sees little risk, the surety may issue the bond instantly and at a flat rate. If the risk is higher, then the process may take longer and the cost will vary.

For applicants with a credit score of 700 or higher, the range is typically between 1-4% of the bond amount.

For applications with a credit score below 650, the rate can range from 5-20% of the bond amount. There may be additional requirements to get the bond approved, including:

  • A letter of credit
  • A personal promissory note
  • Cash collateral
Even if it’s difficult to get a surety bond, it’s very important to fulfill this obligation. Otherwise, your business may face fines, license revocation, or even legal action.

Payment for Surety Bonds

Typically you’ll be expected to pay for your surety bond upfront. But if you can’t afford it, then you may be eligible for premium financing.

In some cases, companies that could technically afford to pay the premium also choose to finance to preserve their working capital.

Either way, premium financing allows you to split the upfront premium into small payments. Usually, the payments are spread over a period of 4-6 months.

In most cases, applicants may qualify for and pay at least 40% of the premium upfront. Then the rest is financed.

The best way to find out whether or not you qualify for premium financing is to request a quote from a qualifying agent and discuss your financing options.

Surety Bonds In Ohio

Surety bonds are required at the city, county, state, and federal levels in the United States.

All Federal contracts greater than $150,000 require surety bonds.

Every state has its own regulations for surety bonds. Local cities and municipalities also may have additional bonding requirements.

In order to be licensed as a contractor in Ohio, you will need the following:
  • $25,000 surety bond
  • General contractor application
  • $350 annual registration fee
For specific projects, the types and amounts of surety bonds required will vary.

You’ll need contract bonds, such as bid and performance bonds, to work on public constructions projects. These requirements are usually set by the local city, town, or municipality

Contract bonds such as bid and performance bonds are needed to work on public construction projects. However, these are usually required by cities or municipalities as opposed to the state of Ohio.

Surety Bonds vs Standard Insurance

There’s one thing about surety bonds that many people just getting started don’t realize.

We’re used to standard insurance policies. You pay your premium and in the event of a loss, the insurance company pays (once your deductible is met).

With a surety bond, the bond company also pays in the event of a claim. However, you have to pay them back in full.

The surety is a guarantee for the party hiring a contractor. The benefit for the company doing the work is the opportunity to bid and get the contract.

To cover your own losses if you’re the company doing the work, you’ll need to purchase other kinds of commercial policies to protect your business.

If you need a surety bond or want to review your commercial insurance portfolio, we’d love to help.

Call or contact Kernan Insurance today for your free quote.

Kernan Insurance Agency

9932 Brewster Lane

Powell, OH 43065

Main office: 614-764-0121
Toll free: 800-718-2663
Fax: 614-764-0310

Office Hours:

Monday - Friday: 7:00 AM - 5:00 PM

Weekends: By Appointment