Surety Bonds

Justin Sonon • August 13, 2024

Types of surety bonds and why they are important

contractor showing plans to a lady


Surety bonds play an essential role in various industries, acting as a form of financial assurance that certain obligations will be met. These bonds are vital for building trust and ensuring compliance with laws and contractual agreements. In this blog, we'll explore what surety bonds are, how they work, and the various purposes they serve across different sectors.


What is a Surety Bond?


A surety bond is a three-party agreement that provides a financial guarantee that a certain task or obligation will be fulfilled. The three parties involved in a surety bond are:


1. Principal: The individual or business that needs the bond. They are the party that will perform the contractual obligation or task.


2. Obligee: The party requiring the bond. This is often a government agency, project owner, or other entity that needs assurance that the principal will fulfill their obligations.


3. Surety: The insurance company or surety company that issues the bond. The surety guarantees the obligee that the principal will perform their obligations. If the principal fails, the surety is responsible for compensating the obligee or ensuring the completion of the obligation.


How Surety Bonds Work


When a principal obtains a surety bond, they are essentially purchasing a guarantee from the surety. The principal pays a premium to the surety company, similar to an insurance premium. If the principal fails to meet their obligations, the obligee can file a claim against the bond. The surety investigates the claim, and if it's valid, compensates the obligee up to the bond's value. The principal is then responsible for reimbursing the surety for any payments made.


Types of Surety Bonds and Their Uses


Surety bonds are used in various industries and for different purposes. Here are some common types of surety bonds:


1. Contract Surety Bonds


Primarily used in the construction industry, contract surety bonds ensure that contractors adhere to their contractual obligations. Key types include:


Bid Bonds: Ensure that a contractor will honor their bid and enter into a contract if selected. If the contractor fails to do so, the bond covers the cost difference to the obligee.


Performance Bonds: Guarantee that a contractor will complete the project according to the terms and specifications of the contract. If the contractor fails, the surety steps in to fulfill the obligations or compensate the project owner.


Payment Bonds: Protect subcontractors and suppliers by guaranteeing that they will be paid for their work and materials. This bond ensures the project owner doesn't face liens or payment disputes.


2. Commercial Surety Bonds


These bonds cover a wide range of non-contractual obligations and are often required by government agencies to protect public interests.


License and Permit Bonds: Required for individuals and businesses to obtain licenses or permits. They ensure compliance with regulations and protect the public from unethical business practices. Examples include contractor license bonds and auto dealer bonds.


Court Bonds: Required in legal proceedings to protect parties involved in litigation. Common types include appeal bonds, which guarantee payment of court costs and damages if an appeal is unsuccessful.


Fidelity Bonds: Protect businesses against employee theft or fraud. These bonds are not technically surety bonds but are often included in the category due to their protective nature.


3. Fidelity Bonds


Although technically a form of insurance, fidelity bonds are often discussed alongside surety bonds because they offer protection against dishonest acts by employees.


Employee Dishonesty Bonds: Protect businesses from financial loss due to theft or fraud by employees.


Business Service Bonds: Protect clients from theft or damage caused by a company’s employees. These are often used by cleaning or service businesses.


The Importance of Surety Bonds


Surety bonds are crucial for several reasons:


Building Trust: They provide assurance to obligees that principals will fulfill their obligations, fostering trust in business transactions and government contracts.


Risk Management: They protect obligees from financial loss and mitigate risks associated with non-performance or unethical behavior.


Legal Compliance: Many businesses are required by law to obtain surety bonds before operating, ensuring compliance with regulations and standards.


Conclusion


Surety bonds are a vital part of the business landscape, offering a safety net for parties involved in contracts and transactions. By understanding the different types of surety bonds and their uses, businesses and individuals can navigate their legal and contractual obligations more effectively, ensuring compliance and building trust in their professional relationships. Whether you're a contractor bidding on a construction project or a business owner applying for a license, surety bonds play an integral role in securing your operations and protecting your interests.

Recent posts

What is Gap Insurance?

By Justin Sonon • September 10, 2025
Gap Insurance: Dealer Add-On vs. Auto Insurance Policy — Which Is the Smarter Choice? Buying a new car is exciting, but it also comes with financial risks. The moment you drive off the lot, your vehicle starts to depreciate in value. If your car is ever totaled or stolen, your standard auto insurance typically pays out the actual cash value, not the balance left on your loan or lease. That’s where Gap Insurance comes in. Short for Guaranteed Asset Protection, it covers the “gap” between what your vehicle is worth and what you still owe your lender. Why You’ll Hear About Gap Insurance at the Dealership When you’re finalizing your purchase, the finance manager often offers Gap Insurance as an add-on. Convenience : You can roll it right into your financing paperwork. Cost : This convenience comes at a price. Dealers typically charge $400– $900 as a one-time fee, and because it’s financed, you’ll also pay interest on it. Commitment : Once it’s bundled into your loan, you’re locked into that cost even if your balance drops faster than expected. For example: if you buy a $30,000 SUV and total it a year later when it’s worth only $24,000, but you still owe $28,000, the dealer’s Gap Insurance would cover the $4,000 difference. Useful—but not always cost-effective. Gap Insurance Through Your Auto Insurance Policy What many car buyers don’t realize is that they can add Gap Insurance directly to their auto insurance policy. Lower Cost : Most carriers charge just $20–$40 per year for the same protection. Flexibility : You can add or remove the coverage as your loan balance changes. Same Protection : It covers the same difference between your loan and your vehicle’s actual cash value. In the SUV example above, adding Gap Insurance through your policy would provide the same $4,000 protection—but at a fraction of the cost. Which Option Is Best? If you like convenience and don’t mind paying more, the dealership option works. If you want long-term savings, adding Gap Insurance to your auto policy is almost always the smarter financial choice. At Sonon Insurance , you can explore whether adding Gap Insurance to your auto policy makes more sense for your wallet. Because protecting your vehicle, and your finances, shouldn’t cost more than it has to.

What Is Cancel For Any Reason Travel Insurance Coverage?

By Justin Sonon • August 26, 2025
Why “Cancel for Any Reason” Travel Insurance Might Be the Best Thing Since Rolling Suitcases Picture this: you’ve been dreaming about your big trip. Tickets booked, bags packed, playlist ready. Then life happens, your cat decides to swallow a Lego, your boss suddenly “remembers” a big project, or you realize that a trip to a tropical island during monsoon season wasn’t your brightest idea. Normally, this is when you’d be stuck with the sad sound of money swirling down the drain. But if you’ve got travel insurance with Cancel for Any Reason (CFAR) coverage , you can laugh in the face of chaos (well, at least chuckle a little). The Perks of CFAR Coverage—With a Side of Humor 1. You Don’t Need a Good Excuse Traditional insurance : “Sorry, that doesn’t count unless your appendix explodes mid-flight.” CFAR coverage: “You woke up and decided you’d rather binge-watch Netflix in sweatpants than fly across the ocean? Cool—we’ve got you covered.” 2. You’re Protected From Family Shenanigans Maybe your cousin suddenly schedules their wedding the same week as your dream cruise. With CFAR, you can cancel the trip and still show up awkwardly holding the world’s most boring salad bowl from their registry. 3. Weather Can’t Ruin Your Parade Who among us hasn’t booked a beach vacation only to arrive during torrential rain? With CFAR, you can check the forecast a few days before and bail, saving yourself from 7 days of Monopoly in a damp hotel room. 4. Peace of Mind for the Overthinker For those who like to plan Plan A, B, and C… and a backup Plan D (just in case aliens land), CFAR is like a security blanket. You don’t have to justify your panic. Cancel. Reschedule. Repeat. 5. Because Sometimes, You Just Don’t Feel Like It Life’s unpredictable. Maybe you’re not sick, maybe no one died, maybe nothing dramatic happened…you just don’t want to go anymore. CFAR says, “That’s enough reason for us.” The Fine Print (Without the Boring Lecture) Most CFAR plans will reimburse up to 75% of your prepaid, non-refundable trip costs—as long as you cancel within the allowed timeframe (usually 48 hours before departure). But hey, that’s a whole lot better than the 0% refund you’d otherwise get for your spur-of-the-moment decision to stay home with your dog. Final Boarding Call Travel is supposed to be fun. Worrying about “what if I need to cancel?” isn’t. That’s why Sonon Insurance recommends adding CFAR coverage to your travel insurance, so whether it’s a real emergency or just an “I’d rather not,” you won’t lose everything you invested in your adventure. Because at the end of the day, sometimes the best trip… is the one you didn’t take.