3 Most Common Types of Surety Bonds You Need to Know

There are many types of surety bonds, and each state has its own bonding requirements for different industries. However, there are three major types of surety bonds that you should know: license and permit bonds, construction and performance bonds, and court bonds.

Bond Types at a Glance:

Basics of a Surety Bond

Before diving into the details of each bond type, let’s go over the basics. Surety bonds are a guarantee of service, performance, and protection. They’re a legal contract among three parties:

  • Principal: The individual holding the bond.
  • Surety: The company issuing the bond.
  • Obligee: The business or government agency requiring the bond.

Businesses and government agencies (obligee) require an individual (principal) to get a bond before they can receive their license to operate or perform a job. Individuals pay a fee (referred to as a premium), typically on an annual basis, to retain a bond from a bond company (surety).

Consumers may file a claim with the surety against a principal’s bond if the individual fails to adhere to government-enforced regulations or violates the terms of the bond agreement. If the surety deems the claim valid, they will compensate the consumer up to the amount the principal is bonded for and will seek reimbursement from the principal for the amount they distributed to settle the claim.

Related Article: What Is a Surety Bond?

License & Permit Bonds

License and permit bonds are typically required before you can get your business license to operate. These bond types are also referred to as “commercial bonds" or “business bonds." Examples of license and permit surety bonds include auto dealer bonds, mortgage broker bonds, and collection agency bonds.

Process Server Bond

A process server bond is required for individuals who deliver legal documents to a defendant in a court case. It’s a legal contract that holds you accountable for any damages to a plaintiff. In your role as a process server, you’re required to obey all state rules and regulations while carrying out your tasks.

There are several states that require process servers to get bonded before they can receive their license. Those states include California, Florida, and New York. The premium for a process server bond is typically a small fraction of the bond’s coverage amount.

Receive your process server surety bond.

Legal Document Assistant Bond

A legal document assistant (LDA) bond is required if you prepare legal documents for a client. Other names for this policy type include “paralegal bond" and “document preparation service bond." LDAs working in California and document preparers in Nevada are required to get bonded to comply with government laws.

Bond amounts and premium costs vary based on your state. For example, Nevada requires such professionals to maintain a $50,000 bond, which is available for a premium of $400 per year.

Learn more about LDA bonds.

Auto Dealer Bond

Auto dealer bonds are required by the Department of Motor Vehicles for dealerships involved in selling, buying, or trading vehicles for sale or resale. Also known as “motor vehicle bonds" or “MVD bonds," they’re designed to protect consumers from fraud or wrongdoing on your end. Market rate for the premium of an auto dealer surety bond is usually 1% of the bond amount required in your state.

Get a bond for your auto dealership.

Mortgage Broker Bond

A mortgage broker bond is required for mortgage brokers, or loan originators, to receive their license. Mortgage brokers in Illinois may know the bond as a “residential mortgage license bond.” This type of license bond is a guarantee you will run your brokerage business with honesty, integrity, and professionalism. It also serves to protect borrowers from financial loss should you engage in illegal activities. Premiums for mortgage broker bonds range from 0.75% to 3% of the total policy amount.

See details about mortgage broker bonds.

Collection Agency Bond

A collection agency bond is required by state governments for agencies looking to make a profit when collecting outstanding debt for their clients. Debt collectors are hired to retrieve debt payments from a company or individual and return that money to the client.

Also known as a “debt collector bond" or “collection agency licensee surety bond" in Maryland, this type of policy is a guarantee you will refrain from unethical and illegal practices when collecting debt. Prices for collection agency bonds vary state by state, but premiums generally range from $100 to $500 per year. These premiums cover bond amounts ranging from $5,000 to $50,000.

Get a quote for your collection agency bond.

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Construction & Performance Bonds

A construction bond guarantees that all expenses or costs associated with a construction project will be paid, whereas a performance bond guarantees a contractor will perform the job as stated in the bond agreement.

This bond protects investors and principal owners of a project from incomplete work or unpaid expenses. If you fail to complete the project accordingly, the surety company may be forced to pay a default judgment and take over the construction management of the project.

The premium for a performance bond varies as 1% of the total coverage amount and can reach up to 10% depending upon the principal’s financial circumstances, available collateral, and scope of work.

Contractor License Bond

A contractor license bond is required for contractors seeking their business license. The premium for a contractor license bond can be as low as 1% of the total coverage amount and can reach up to 15% if you have a low credit score.

Get a contractor license bond online.

Plumbing Contractor Bond

A plumbing contractor bond is required for plumbers to legally perform their services. It’s a guarantee that your work will be done with professionalism and quality. With this type of bond, you can be held liable if your work fails due to faulty materials. Plumbers are required to be bonded in Illinois, Iowa, Minnesota, New Jersey, and Washington D.C.

Annual costs for a plumbing contractor bond can range from less than 1% to 10% of the total policy amount.

Learn more about plumbing contractor bonds.

Home Improvement Contractor Bond

Home improvement contractor bonds are required for contractors before they can take on projects that involve the construction or remodeling of residential land. This bond type serves as a guarantee to consumers that your work will be up to code and meet state regulations.

This type of construction bond allows homeowners to file a claim should your work fall short of industry standards or fail to meet their expectations. Premiums for home improvement contractor bonds range from 1% to 5% of the bond’s full amount.

Get bonded as a home improvement contractor.

Court Bonds

Court bonds are the third type of surety bond you should be aware of. These bonds are for individuals involved in court proceedings, and they protect consumers from litigation fees and financial loss. Common types of court surety bonds include probate bonds, appeal bonds, and trustee bonds.

Probate Bonds

A probate bond is required for appointed administrators, executors, guardians, and trustees. Also known as “fiduciary bonds," probate bonds are a guarantee you will carry out your duties legally and ethically. The cost of this court bond type varies based on the estate’s value for which you’re responsible. At the very minimum, expect to pay at least 0.5% of the surety bond amount.

Appeal Bonds

An appeal bond is required by both federal and state courts for defendants who lose a case and want to appeal to a higher court. This type of court bond guarantees you will provide payment for the original judgment.

Also known as “supersedeas bonds," the cost of appeal bonds typically average around 1%. In addition to the premium, you will also need to pay the fees and interests during the appeal up to a certain amount and provide collateral in the bond’s full penal sum.

Trustee Bonds

Trustee bonds are required by the court for individuals who are appointed as trustees. A trustee’s responsibilities include managing property and assets within a trust and distributing them to the appropriate beneficiaries accordingly. This type of court bond is designed to protect consumers from potential loss. A judge determines trustee bond costs, and premiums are typically a small percentage of the coverage amount.

Get the Right Bond for Your Business

As you’ve read, the purpose of surety bonds is to protect the public. However, they also add credibility to your work and provide consumers peace of mind as you complete the job. To get the right kind of bond for your business, contact NNA Surety Bonds for a free quote. As one of the nation’s largest producing surety bond agencies, we have relationships with multiple carriers to get you the best rate.

Now that you understand the different types of bonds available, learn how to get a surety bond for your business.

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