A surety bond is a contractual agreement that ensures a party’s commitment to properly satisfy a “debt, default, or failure.” There are three different parties involved in these agreements. The obligee may be a government agency or other owner of a project needing to be completed.

The principal in the agreement is the party that is committed to performing services or providing products such as a contractor. The surety is a state-approved entity that is protecting the owner of the project (obligee).

Contract vs Commercial Bonds

The National Association of Surety Bond Producers explains that the two categories of surety bonds are contract and commercial. Commercial bonds are also commonly referred to as miscellaneous bonds. Contract bonds are often associated with construction projects. A contractor may be required to secure a bond as a means of protecting the owner of a project if the contract is not satisfied. 

Commercial surety bonds may be a requirement according to state statute, local ordinance or another agency requirement. Individuals and businesses must secure a surety bond to remain compliant with these laws. They are most commonly issued for one-year but certain types extend for two years.

Types of Commercial Surety Bonds

  • License and permit bonds: Those who operate in certain professions may be required to obtain these types of bonds. Common examples include automobile dealers, mortgage brokers, and various specialty contractors.
  • Court (or judicial) bonds: Parties that are involved in judicial proceedings may secure bonds that protect other litigants or parties. They may or may not be required by law. Common examples include appeal bonds, guardianship, and attachment bonds.
  • Fiduciary (or probate) surety bonds: These may be required for those who are administering a trust that is subject to court oversight. A fiduciary is commonly also referred to as a trustee. A fiduciary role is associated with those in a position of trust that has some ethical or legal relationship with another party.
  • Public official bonds: Those who hold public office may have a bond requirement. They commonly apply to those serving as a treasurer or county clerk. This protection is afforded to the public if the official commits acts of wrongdoing.
  • Miscellaneous bonds: The term miscellaneous applies to surety bonds that do not fit into the primary categories. There are many types including fuel, warehouse, and utility bonds.

Performance Bonds

Construction projects generally require that contractors are prequalified before being deemed eligible. A performance bond provides the project owner with protection in the event of default or another failure to complete a project. Contractors may be assessed based on their financial standing and work history.

The project owner is placed in a risky position when a contractor fails to meet their obligations. The bond may be used to retain another contractor or otherwise provide critical financial resources to ensure the work is properly completed.

Bonds vs Insurance

Surety bonds are often incorrectly viewed as being a form of insurance. They are not insurance policies and will not protect a party from problems such as those involving construction liabilities. A surety bond is used to compensate for obligations specified on the bond. The requirements of the value of a bond may vary based on a host of factors.

For example, an Arizona contractor’s license bond amount is determined by estimating the volume of earnings for the coming year. The bond’s value may range from roughly $5,000 to nearly $100,000. Bond value and type vary in Arizona and differ in other states or for specific circumstances. In California, contractors are generally required to maintain a $12,500 bond.

In Washington State, the contractor is required to meet both surety bond and insurance requirements. To be an eligible contractor for Northern Arizona University, the requirements include commercial general and automobile liability insurance. This is in addition to worker’s compensation coverage and the surety bond(s) specified in the contract.

Agency Provider of Commercial Bonds in Arizona

The Gebhardt Insurance Group offers a truly comprehensive array of products for individuals, families, and businesses. This includes insurance for your home, life, and automobile and contract and commercial surety bonds. We now have offices in Casa Grande and Maricopa for the convenience of our customers. You are encouraged to contact us today to speak with one of our professionals.