Surety Bonds

What is a Surety Bond?

A surety bond is an agreement between three parties: 

  1. The Principal: the party, generally an individual or a business/organization, that obtains the surety bond in order to guarantee that they will fulfil a certain duty. This is generally some type of work (e.g. constructing a building, act as a guardian or conservator, etc.) or a “promise” to, or not to, perform a certain action (e.g. violate a temporary restraining order).  
  2. The Obligee:the person or party whom the surety bond protects. This is the party who is being promised that a certain contract will be fulfilled, or an action will or will not be taken. 
  3. The Surety: the company that the surety bond is purchased from. The surety is also the party who provides financial payout to the obligee in the event that the principal violates the terms of the bond/contract. 

Are Surety Bonds Insurance? Are They Contracts?

The answer is yes to both, but with several differencesSurety bonds are a type of insurance, but not in the “normal” sense of the word. Under normal circumstances, a party would purchase insurance to protect themselves should a certain event happen. For example, a business would pay for commercial liability insurance (from an insurance company) to protect itself should a person become injured while on their property. This insurance protects the business, and the business pays for it. 

In the case of a surety bond, it is still the business (principal) who purchases the insurance, but it does not provide protection for the business. Instead, it provides protection for the customer (obligee)In this case, the surety acts as the “insurance company” that collects payment from the principal and pays out claims to the obligee. 

It’s also true that surety bonds are a type of contract whereby the principal signs and promises to complete a project, uphold another contract, follow a court order, etc. However, the important differentiator is that a surety bond does not guarantee the principal will do any of these things, just that the surety will provide financial recompense to the obligee in the event the principal violates the agreement. For example, a business (principal) could sign a contract with a person (obligee) to perform work for them. Should the business not be able to complete the project, the person could file a claim with the surety and receive a payout based on the terms of the surety bond. 

Types of Surety Bonds

There are many types of surety bonds for many types of businesses, legal cases, and other situations. These can be broken into several major types of surety bonds: 

  1. Court bonds:surety bonds used for legal cases. These are generally required for injunctions, replevin, writs of attachment, etc. 
  2. Fiduciary bonds:surety bonds used for fiduciary purposes. These are generally required for guardianships, conservatorships, representative payees, personal representatives, trusts and trustee, and power of attorney. 
  3. Appeal bonds:surety bonds used for legal cases. These are generally required for certiorari, appeals processes, supersedeas, etc. 

Other types of bonds include licensing bonds, which can be required for businesses in certain industriesExamples of these types of bonds include: 

  1. Construction surety bond (Performance and payment bond): this type of surety bond protects against a construction contractor’s misconduct or fraudulent behavior. 
  2. Freight broker surety bond: this type of bond protects against fraud or unethical actions carried out by anyone operating a transportation broker. 
  3. Auto dealer surety bond: this type of surety bond protects fraud or unethical actions carried out by anyone operating an auto dealership. 
  4. License bonds for many other businesses: these can include plumbers, electricians, and many other types of businesses. 

The list can go on when it comes to surety bonds for companies. When starting a company, make sure to check with state and local laws to see if your business I required to obtain a surety bond based on the type of work you do. 

Learn more about the different types of surety bonds below.

Contact an Agent

The safest, fastest and most reliable way to obtain a surety bond is to work with a qualified surety bond agency. At The Patrick J. Thomas Agency, we have been serving Minnesota businesses, attorneys and fiduciaries for generations. We can help you find and obtain the surety bond you need. We work with reliablefederally recognized sureties, and have worked with court systems all across the state of Minnesota. We are also licensed to obtain surety bonds in numerous other states across the country. Get in touch with our qualified agents to get started on your bond application today.