Glossary

Surety bond

A three-party guarantee in which a surety promises an obligee that a principal will perform or pay, with the principal bound to repay the surety for any loss.

Also called: bond, contract bond, commercial surety bond, suretyship

A surety bond involves three parties: the principal, who must perform; the obligee, who is protected; and the surety, which guarantees the principal's obligation. If the principal defaults, the surety may pay or arrange completion, but unlike an insurer it expects to be repaid. The principal signs a general indemnity agreement promising to reimburse any loss, so the surety underwrites credit, character and capacity as much as risk. Insurance transfers risk; a bond extends credit.

Bonds come in two broad groups. Contract bonds (bid, performance and payment) support construction work. Federal construction contracts above $150,000 require performance and payment bonds under the Miller Act (FAR 28.102-1, as revised in March 2026). Commercial bonds, such as a license and permit bond, satisfy regulators; California's contractor license bond has been $25,000 since Jan. 1, 2023. The premium is a percentage of the bond amount set by credit, financial statements and bond type, and the surety bond cost calculator gives a rough range.

The common misunderstanding is that the bond protects the principal. It protects the obligee, and a paid claim comes back to the principal, and often to its owners personally, through the indemnity agreement. Strong financials widen the surety's willingness to bond. The guide on surety bonds explained: how they differ from insurance covers the differences from insurance.

Last reviewed October 10, 2026

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Related terms

Bid bond A surety bond guaranteeing that a contractor who wins a bid will sign the contract and furnish the required performance and payment bonds. Performance bond A surety bond guaranteeing a contractor will finish a project under its contract; if it defaults, the surety completes the work or pays the owner. Payment bond A surety bond guaranteeing a contractor will pay its subcontractors, laborers and suppliers on a project; unpaid parties can claim against the bond. License and permit bond A surety bond a government agency requires before issuing a license or permit, guaranteeing the holder will follow the law and pay those harmed. General indemnity agreement The contract in which a bonded business, and usually its owners, promise to reimburse a surety for any bond losses and costs.

Related guides

Bid, performance and payment bonds: how contract surety works Bid, performance and payment bonds guarantee construction work. What each covers, the federal and state rules, and how subcontractors and suppliers claim. Contractor license insurance and bond requirements by state What each state's contractor license requires in liability insurance, workers' comp proof and bonds, for all 50 states and DC, from the agencies' own rules. Employee theft coverage and fidelity bonds: what they cover and who needs one A fidelity bond or employee theft coverage pays when staff steal. How first-party, client and ERISA bonds differ, who counts as an employee, and ERISA's rules. ERISA fidelity bonds vs fiduciary liability insurance An ERISA bond is required and covers theft by people who handle plan money. Fiduciary liability insurance is optional and covers breach claims. How each works. FMCSA insurance requirements and filings for motor carriers FMCSA sets minimum liability limits for for-hire and hazmat carriers, proved by an MCS-90 and insurer filings. Limits, forms, cancellation rules, penalties. Insurance requirements for government contractors Federal contract insurance and bond rules: FAR 28.307-2 minimums, FAR 52.228-5 and 52.228-7, Miller Act bonds under 40 U.S.C. 3131, and what to expect on a bid.

Related insurers

American Family Insurance Wisconsin mutual known for home and auto; insures small businesses and farms through AmFam agents and Main Street America's independent agents. Arch Insurance U.S. arm of Bermuda-based Arch Capital; specialty, E&S and (since buying Allianz's book in 2024) middle market P&C through brokers, MGAs and programs. Ascot Group Bermuda specialty insurer majority-owned by CPP Investments; its U.S. arm writes E&S and excess casualty, professional lines, surety, marine and comp. CNA Chicago commercial insurer controlled by Loews, sold through agents and brokers. Strong in professional liability, healthcare, surety and specialty lines. Crum & Forster Fairfax's Morristown specialty carrier: admitted and E&S casualty, construction, property, surety and accident and health, sold through agents and wholesalers. EMC Insurance Des Moines mutual founded in 1911, selling commercial property, auto, liability, workers' comp and surety bonds through independent agents in over 40 states.

Related industries

Auto dealer insurance What new and used car dealers need: garage liability, dealers open lot physical damage, garagekeepers, state dealer bonds, floorplan lender terms and cyber. Brewery, winery and distillery insurance Insurance for craft breweries, wineries and distilleries: product liability and recall, taproom liquor liability, stock and spoilage, fire, and federal bonds. Home health care insurance Home health and home care agencies: professional liability, abuse and molestation, hired and non-owned auto, comp, EPLI, cyber and Medicaid bond rules. Pharmacy insurance What pharmacies need: pharmacist liability, compounding terms, BOP with refrigeration cover, cyber and HIPAA, the DMEPOS bond and license defense. Physical therapist insurance PT practices: professional liability with license defense, abuse sublimits, BOP, cyber and HIPAA, comp for lifting injuries and the DMEPOS bond exception.

Related tools

Surety bond cost calculator Estimates a surety bond premium from a flat rate or a tiered rate schedule, adjusted for credit and subject to a minimum premium. Example rates, not a quote.

Related en español

¿El seguro para negocios es obligatorio por ley? Ninguna ley exige un seguro para negocios en general, pero los estados exigen compensación al trabajador y auto; arrendadores y contratos piden más. Fianzas de licencia y permiso: quién necesita una y cómo funcionan Una fianza de licencia o permiso es una garantía que el gobierno exige antes de otorgarle la licencia. Montos reales, cómo van los reclamos y qué pasa si vence. Fianzas de licitación, cumplimiento y pago: cómo funcionan en construcción Fianzas de licitación, cumplimiento y pago para obras: qué cubre cada una, reglas federales y estatales, y cómo reclaman subcontratistas y proveedores.