The process of obtaining a bond:

   

 

 

 Contractor                        Enters into Contract                      Bond Guarantees Contract

 

Surety Bond or Insurance?

In a traditional insurance transaction the risk is transferred to the insurance company whereas in bonding, the risk remains with the person the bond is issued FOR or the principal. The protection of the bond is not for the principal, but for the obligee (to whom the bond is issued TO). With an insurance policy the insurance company expects that a certain percentage of the premium be paid out in losses. When bonds are issued, the premium paid is basically a service charge for the use of the bonding company’s guarantee. Bonding is  viewed as a form of credit and the underwriting is very similar to bank underwriting for a loan or a line of credit. Not everyone is eligible for bonding; finding a bond with poor credit or a being new in business only adds to the frustration of finding someone willing to write a bond for you.

What Does is mean when people say they are “bonded”?

The phrase “licensed and bonded” is one you may see on an ad for a contractor, a lawyer or a CPA.  Obviously, they are using the phrase for marketing purposes to show they are creditworthy. What does it mean when you see someone is bonded? It means that a bonding company (also known as a surety) is guaranteeing the performance of their business per the terms of their license or contract. If the  principal (the contractor or whoever is doing the work) fails to fulfill their end of the contract, then the obligee can file a claim with the surety company to recoup losses incurred.

These companies are not purchasing bonds simply for advertising purposes; some governmental entities require that they be bonded. In Nevada, the State Contractors Board requires that all new contractors have a license bond. There are literally hundreds of different occupations that are required to post a surety bond to local, state, or Federal governments. It is extremely important to find out whether you need to post a bond to run your business. Operating without a bond when one is required can result in the governmental or licensing agency halting your businesses operations.

McCormick Insurance Bond Forms
Surety Bond Types
Basics of Surety Bonding
Surety Glossary - Definitions of Surety Related Terms