Most business owners, have a hard time understanding what a bond is, and why commercial bonds are needed. Basically, a bond is a “guarantee” that the insurer will pay if the insured fails to complete a contract with a client. The different bond types are: Contract, Surety, and Fidelity Bonds.

The Three Main Types of Commercial Bonds

Contract Bonds

Bid, Performance, Payment, and Maintenance Bonds fall under this category. Typically, these bonds are purchased by commercial building contractors and some trade contractors. The project owner usually requires the contractor to purchase a bond equal to the contractor’s bid to complete the job. This ensures that if the contractor does not complete the job per the contract, the project owner can claim on the bond. Usually, these bonds are heavily underwritten by the insurance carrier. Financial Statements, Credit Check, Copy of the Bid, and Bond Application is required to issue a Contract Bond. The process of obtaining a Contract Bond is like obtaining a loan and can take several days for approval. We suggest that as soon as you have your bid, start the Contract Bond process. Waiting to start this process until you are awarded the contract will frankly be stressful for all parties involved. We also suggest you get pre-approved for a Contract Bond limit. Most carriers will review all your financial information, and pre-approve you up to a certain limit. This allows for a seamless process, and in most cases reduces bond cost.

Surety Bonds

License & Permit, Probate, Land Use, and Court Bonds fall under this category. Most of these bonds are in smaller denominations and are inexpensive. These bonds are usually required by municipalities to obtain a certain business license, or authorization to alter a road, entrance, or right of way.

Fidelity Bonds

Employee Dishonesty, Business Services, and ERISA Bonds fall under this category. These bonds provide coverage for the potential misuse of money, and for stolen property. Most non-profits, janitorial risks, and companies with 401ks will have this type of a bond.

Frequently Asked Questions About Commercial Bonds

The cost will depend on the type of bond, bond limit, and industry type. Almost always Contract Bonds are the most expensive since they carry the highest risk. Surety, and Fidelity Bonds, usually cost about $100-$250 a year. It just depends what type of bond you need.

Work with a commercial insurance agent that has access to multiple bond carriers. This is especially important when you need a Contract Bond since they are based mostly on credit worthiness. Most agents that sell Commercial Bonds have specialized knowledge, never purchase a bond online since mistakes can be made on the bond form. This will require the bond to be revised, which in most cases will cost additional premium.