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By definition, a bond is a thing used to tie something or to fasten things together or an agreement with legal force, in particular.

When applied to the insurance surety world, a bond binds one entity or person to another entity or person with financial consequences as well as a third party, the insurance company.  In this case, the insurance company is counting on the idea that the promises and responsibilities of the contract holder are successfully fulfilled by the person or entity performs the work. Should the entity performing the work fail to complete the project as agreed upon, the surety company will source another group to ensure that the contractual obligations are fulfilled. Subsequently, any monies paid out by the bonding company in order to satisfy the terms of the contract will be collected from the initial contractor that did not satisfy the terms of the agreement.  

In the insurance world, there are over 300 different types of bonds. However, the two most common categories are commercial surety and contract/construction surety bonds.

  • Commercial Surety Bond – This category includes a vast variety of bond types. The majority of them are in place to provide security that the person or entity performs their duties in a legal and ethical manner without fraud, deception or dishonesty. At a high level, these bonds ensure that you are who you say and are capable of doing what you say you will. Some examples of commercial surety bonds are license and permit bonds, auto dealer bonds, employee dishonesty bonds, appeal bonds, trustee bonds, and notary bonds.
  • Contract Surety Bond – This is a much smaller category as it is typically associated with the construction industry. Contract surety bonds guarantee that the service provider, contractor, supplier or developer will fulfill the contract per the plans and specifications of the agreement as well as pay all outstanding liabilities associated with that contract (labor, materials, and subcontractors). The main types of surety bonds for these are bid bonds, performance bonds, payment bonds, supply bonds, site improvement bonds, and subdivision bonds.

Typically, there is not much detail involved with the process of getting a “Commercial Surety Bond” in most cases it is just purchasing a fixed dollar amount bond let’s say $10,000 and off you go. In some cases, you may need to send in a copy of your financials to show the surety company you are good for it. But some can get a little stickier, for example, a multi-million dollar judgment that is being appealed (appeal bond).

Contract surety bonds have a lot more moving parts to them and there is not an upper limit in cost to the surety to make good on the bond if a claim is made. This is why they are more expensive and harder for the contractor to qualify for. In fact, it is a fairly common practice for a private owner to require bonding capability as a pre-qualification criteria for their project. In some cases, a bond is required to even bid on a project. By doing this, the entity overseeing the project know that a third-party has reviewed the contractor’s financial stability and performance record.

Stay tuned in the next couple weeks as you will see in the following blogs navigating through the world of bonding can be difficult and daunting.

Here at Alliance Insurance Group, not only do we have people on our staff that know insurance, but most importantly we have a retired owner of a general contractor that has nearly three decades of experience wearing the same boots you wear and a lawyer familiar with construction law on staff, not many companies can offer that!

Fill out a quick form on our bond page or the short form right below and our local bonding expert will get in touch!

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Alliance Insurance Group
7910 Ralston Rd., Ste 7
Arvada, CO 80002

Phone: (303) 279-9700
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