Surety Bonds 101: What Are They and Who Needs One?

Learn about Surety Bonds: what they are, who needs one, and how to get them. Our qualified team at Morris & Garritano is here to help!

What is a Surety Bond? 

Surety bonds are part of a specialized line of insurance that is meant to protect consumers and government entities from fraud and malpractice during the performance of an obligation.  

It is a written contract between three parties: 

1. The Principal: the party that undertakes the obligation
2. The Surety Company: the party that guarantees the obligation will be performed
3. The Obligee: the party who is requiring the bond and receives the benefit of work being done

In simple terms, a surety bond acts as a safety net to protect the obligee if the principal doesn’t meet their responsibilities. It serves as a form of insurance or guarantee that protects one party from potential losses caused by another party’s failure to fulfill their obligations. 

Who Needs a Surety Bond? 

The construction industry makes up a large portion of the surety market.  

If you are a contractor bidding on a job, you may be asked to obtain a Bid Bond which will ensure that you are able to enter into a contract with the owner and perform the necessary duties within the project scope. 

For example, let’s say a construction company is awarded a contract to build a new office building. The project owner, who is the obligee, may require the construction company to obtain a surety bond.  

This guarantees that the construction company will complete the project according to the contract’s terms. If the construction company fails to complete the work as agreed, the surety bond will compensate the project owner for any losses incurred, such as hiring a new contractor to finish the construction. 

What Should I Consider When Getting a Surety Bond? 

In order to quickly and efficiently qualify for a Bid Bond, it is helpful to have an established relationship with a reputable surety company. Not only can they provide your Bid Bonds, but they will also be able to issue the Performance and Payments bonds required on projects.  

The stronger the relationship you have with a surety company, the greater the ability to strengthen your bonding capacity and grow your business. 

Certain licenses and permits also require a surety bond, most commonly government-funded agencies. For example, the California Contractors License Board requires a $15,000 bond in order to obtain a license; this bond protects the CSLB from complaints filed against license-holders.  

Other agencies, such as the Alcohol and Tobacco Tax and Trade Bureau, require Tax Excise bonds for wineries and state-to-state shipping for wine clubs. Permit and License bonds tend to be affordable and are easily written. 

If you are not sure what kind of surety bond you need, you can ask the entity requiring the bond (the Obligee) and they will communicate the type of bond and the bond amount needed. 

Surety Bonds Assistance with M&G

Whether you are a contractor looking for a complex Bid Bond or a business owner in need of a simple Permit and License bond, Morris & Garritano can help! We only work with the most reputable and trustworthy surety companies offering competitive market rates.  

If you find yourself in need of a bond, do not hesitate to contact our Bonds & Surety department. We have knowledgeable advisors ready to help and answer any questions you may have. Our team is available online or by phone.