All About Surety Bonds: A Comprehensive Overview
You might have heard about surety bonds and wondered what they are and how they work. If so, then you have come to the right place. Surety bonds are tools that impact nearly every part of society, from the roads we drive on to the quality of medical care we receive, and for this reason, we want to explore this important topic further with you. Although surety bonds are a complex topic comprised of many different categories, we have simplified them by breaking down some of their broader categories into subcategories, thus making them more digestible.
Before we dive into the different categories, let us briefly take a look at what surety bonds are.
So, What Exactly Are Surety Bonds?
Surety bonds are contracts between three parties constituting legally binding three-way agreements. They are used to ensure that businesses and individuals keep their obligations in any given arrangement, and thus these bonds function as a type of insurance.
The three parties that form these agreements are:
The Principal – This is you or whoever else needs the bond.
The Surety – This is the party that provides a guarantee to the obligee in place of the principal.
The Obligee – This is the party that demands the principal get the bond.
What Are Our Specialties?
We specialize in the following types of surety bonds:
License and Permit Bonds for construction and beauticians
Lost Instrument Bonds
Janitorial Services Bonds
We do not handle bonds related to customs, bids, or construction projects.
For more information, check out our home page or call us at Las Vegas: (702) 850-7711 / Memphis: (901) 306-8100.
How Many Types of Surety Bonds Are There?
Truth be told, there are hundreds of types of surety bonds, but, generally speaking, there are four main categories that make up the whole.
Court or Judicial Bonds – They are used for court cases and have various purposes.
Commercial or Business Bonds – They are used to protect companies, employees, and customers.
Fidelity Bonds – They are designed to protect policyholders from fraud.
Contract Bonds – They guarantee that contract obligations are met.
As mentioned above, each of these main categories can be broken down into various sub-categories. Let us go ahead and dig into the details.
Court Bond Sub-categories
The first major sub-category for court surety bonds is Judicial or Civil Court Bonds. These are used to provide protections and assurances during court cases.
The two additional sub-categories for Judicial or Civil Court Bonds are:
- Plaintiff, Plaintiff’s Attachment, or Attachment Bonds – They guarantee that plaintiffs in court cases will pay damages to defendants if the court rules in the defendants’ favor. These bonds are used for disputes between creditors and debtors. The creditor (plaintiff) may try reclaiming the defendant’s property to ensure that the defendant will pay their debt, or the creditor may seize property to satisfy the debt. If the court rules in the defendant’s favor, the creditor must pay the damages resulting from litigation. If the creditor refuses to pay, then the surety is required to pay the defendant on the creditor’s behalf. Before the trial begins, creditors are required to purchase these bonds in an amount decided by the court or state.
- Defendant Bonds – These bonds are used in criminal cases. They are designed to make sure that defendants keep their court appointments, offer various protections, and create various stipulations.
There are specific bond types that divide these additional categories still further.
For Plaintiff, Plaintiff’s Attachment, or Attachment Bonds, they are:
- Injunction/TRO Bonds – They protect defendants against damages caused by unnecessary or illegal temporary restraining orders (TROs). These bonds guarantee that plaintiffs will pay damages to defendants if the court rules in the defendants’ favor but can also apply to other injunctions. For example, a court may order a construction company to stop dumping material waste on private property.
- Indemnity to Sheriff Bonds – They protect law enforcement officers from losses when a court orders them to confiscate property. In these situations, it is not uncommon for defendants to seek damages against law enforcement officers after the property has been seized, thus creating a lawsuit.
- Lis Pendens Bonds – They are used when the plaintiff wants to stop the defendant from selling or loaning property. An example would be a husband or wife trying to sell a house (defendant) against the wishes of their spouse (the plaintiff). This bond applies to the plaintiff and guarantees that they have filed the Lis Pendens claim (which notifies the public that there is a lawsuit on a property) in good faith.
- Release of Lis Pendens Bond – They offer recourse to defendants trying to sell property and provide protection from litigation costs.
- Replevin Bonds or Claim and Deliver Bonds – They are used when the plaintiff reclaims personal property from the defendant. These bonds guarantee that the defendant’s property will be returned and that the plaintiff will pay litigation costs if the court’s ruling favors the defendant.
- Counter Replevin Bonds – They are used as counterclaims to replevin bonds to stop repossession of property. These bonds guarantee that the defendant will give the property back to the plaintiff if the court rules in the plaintiff’s favor.
- Garnishment Bonds – They are used by the plaintiff when garnishing the defendant’s wages or financial property. These bonds guarantee that the plaintiff will have access to the defendant’s wages or financial property given a favorable court ruling. However, if, on the other hand, the defendant wins the case, the bond protects the defendant from damages caused by litigation. To ensure the conditions of the bond are met, a third party holds the defendant’s wages or financial property until a decision by the court has been made.
- Cost Bonds – They guarantee that court expenses are paid by the principal, i.e., whoever needs the bond. These bonds apply to and are often required by plaintiffs in court cases.
- Distraint Bonds or Distress Bonds – They are used when a tenant (defendant) is removed from a commercial property for not paying rent. These bonds protect the defendant and offer compensation if the court rules in their favor.
- Sequestration Bonds – They are used when the plaintiff seizes the defendant’s property to satisfy the defendant’s debt. These bonds protect the defendant from losses resulting from litigation in the event the court rules in the defendant’s favor.
For Defendant Bonds, the specific bond types that divide this category further are:
- Bail Bonds – They provide assurance to the court that the defendant will keep their court dates and abide by other requirements.
- Appeal or Supersedeas Bonds – They make sure that the defendant pays the original judgment in case of a failed court appeal.
- Immigration Bonds – They are used when the Department of Homeland Security arrests people who are not U.S. citizens.
- Dissolve Injunction Bonds – They are filed by the defendant to cancel injunctions. These bonds protect the plaintiff if the court rules in the plaintiff’s favor.
The second major sub-category of court surety bonds is Probate or Fiduciary Bonds. These are used to provide protections and assurances in various situations.
The three additional sub-categories for Probate or Fiduciary Bonds are:
- Guardianship Bonds – These bonds are used to ensure that court-appointed guardians will fulfill their obligations and act with integrity toward their wards. An example would be a disabled adult needing a caregiver who manages their finances. In this case, the bond would apply to the caregiver.
- Executor Bonds – This type of bond guarantees that the fiduciary named by the will of the deceased manages estate assets properly. The bond applies to the named party (fiduciary) whose duty it is to act in good faith, manage assets in good conscience, and not take advantage of the estate’s beneficiaries.
- Trustee Bonds – These bonds guarantee that the trustee fulfills their obligations and acts in the best interest of the trust’s beneficiaries.
There are specific bond types that divide these additional categories further as well.
For Guardianship Bonds, they are:
- Custodian Bonds – They guarantee that custodians fulfill their duties and act in good faith toward their wards or beneficiaries, for example, a minor or a disabled person. These bonds share a lot of similarities to Guardianship Bonds, but typically, the role of a guardian is to be responsible for the daily activities and financial care of their wards, while custodians are responsible for managing financial assets until their wards reach a certain age.
- Conservatorship Bonds – They ensure that conservators act in good faith toward the conservatee and their estate. A conservator is someone who becomes the legal guardian of an adult who is deemed incapable of taking care of him or herself.
For Executor Bonds, they are:
- Administrator Bonds – They ensure that the administrator of an estate will fulfill their obligations and behave in accordance with the law. These bonds protect the estate in the event that the administrator acts in bad faith. These bonds are similar to Probate or Executor Bonds, except that administrators are court-appointed instead of named in the will of the deceased while executors are named in the will.
- Personal Representative Bonds – They guarantee that the fiduciary of a deceased person fulfills their duties according to the law and acts in good faith. These bonds protect the estate’s beneficiaries. What makes these bonds unique is that personal representatives can be either administrators or executors.
For Trustee Bonds, they are:
- Receiver Bonds – They are used when a person is appointed by the court as an auxiliary to receive control of a business (along with certain assets) in a lawsuit. These bonds protect against misuse of the receiver position. An example would be a bakery going out of business. If, during the liquidation process, the receiver takes half of the remaining baked goods for him or herself, the owner of the bakery can file a claim against the bond.
- Bankruptcy Trustee Bonds – They are used to protect creditors when there is a bankruptcy case. These bonds apply to court-appointed trustees, guaranteeing that trustees will fulfill their duties as required by the U.S. Bankruptcy Code.
A Few Important Points
We hope the information above was helpful! We know it is a lot to digest, and there is still more ground to cover, so before we dive into the next section, we want to mention three important points that may make things easier going forward.
First, even though court bonds can involve businesses, they are indeed different from commercial bonds. Second, the main difference between court and commercial bonds is that court bonds are required by courts, whereas commercial bonds are just any type of bond that commercial businesses use. Third, and perhaps most importantly, there are numerous commercial bonds, and many of them overlap with contract bonds and fidelity bonds. For this reason, we have omitted certain extra sub-categories in the following commercial bond section.
Commercial Bond Sub-categories
Common sub-categories for commercial bonds are:
Federal or Non-contract Bonds – They are mandatory bonds for businesses required by the Federal government. For example, Medicare providers are sometimes required to get non-contract bonds to guarantee honest practices and protect patients and other parties.
Note, two additional sub-categories for Federal or Non-contract Bonds are:
- Customs Bonds – They are used when importing goods into the United States. These bonds ensure that all import obligations are met by importers, such as paying their duties and taxes.
- Excise Bonds – They ensure that businesses will pay their excise taxes. These bonds make shipping easier for businesses by allowing them to ship goods before their excise taxes are paid.
Other common sub-categories for commercial bonds are:
Business Service Bonds – These bonds safeguard customers and clients from malicious acts performed by companies, their owners, or employees. These are not fidelity bonds, although they are similar to fidelity bonds. A few types of business service bonds are janitorial service bonds, security guard bonds, and contractor bonds (not to be confused with contract bonds). There are numerous other types, as well.
License and Permit Bonds – These bonds are in place to protect customers and ensure that businesses follow the laws within their jurisdiction, including wage and employee laws. There are several types of License and Permit bonds, too many to name here, but some examples include freight broker bonds, DMEPOS bonds, auto dealer bonds, and notary bonds.
Public Official Bonds – They ensure that public officials faithfully perform their duties and do not take advantage of their position. These bonds are often used when officials are responsible for handling public funds.
Two additional sub-categories for Public Official Bonds are:
- Faithful Performance Bonds – They provide protection when the principal fails to perform their duties. Sometimes these bonds are used interchangeably with Public Official Bonds. However, Public Official Bonds also encompass fidelity bonds, which are a different bond type.
- Fidelity Bonds – They protect businesses from fraud. *Note, see more about fidelity bonds below.
Finally, there are Miscellaneous Bonds. These are used for various purposes relating to commercial businesses.
Fidelity Bond Sub-categories
The two main types of fidelity bonds are:
First-party Bonds – These bonds protect companies from fraud and other malicious acts by employees or by clients and customers. For example, a bank may require a bond for employees to keep them from purposely writing duplicate cashier’s checks.
Third-party Bonds – These bonds protect companies from harmful acts by contract workers, such as consultants and independent contractors. For example, a construction sub-contractor may choose to dump material waste on private property rather than pay a disposal fee at a waste facility, resulting in damage to the client’s property. This would most likely lead to a lawsuit, which is where the bond would come into play.
The two main fidelity bond types take the following categories:
- Employee Theft Bonds or Employee Dishonesty Bonds – They specifically protect companies from theft and other malicious acts by employees. These bonds do not provide protection when employees steal from customers or clients.
- Janitorial Service Bonds – They can protect clients and customers from theft by employees. There is some disagreement about whether these bonds count as business service bonds or fidelity bonds. Both bond types can provide protection for clients and customers from theft, but fidelity bonds only offer this protection if third-party protection is specified in the contract language.
- ERISA or Pension Bonds – They protect retirement plans from fraud, particularly by those who manage the plans. These bonds do not protect against disruptive or inattentive management by plan managers.
One of these bond categories, Employee Theft Bonds or Employee Dishonesty Bonds, can be divided into further categories. They are:
- Blanket Position Bonds – They are a type of blanket bond that protects companies from malicious acts from employees, with protection limits differing depending on the role of the employee.
- Schedule Bonds or Name Schedule Bonds – They protect companies from malicious acts from employees on a named basis. These bonds only cover high-risk employees or employees in high-risk positions who have been specifically named by the bond.
- Blanket Honesty Bonds or Primary Commercial Blanket Bonds – They protect companies from malicious acts from employees, applying the same protection limits to all employees.
A Quick Note
Similar to commercial bonds, contract bonds contain numerous types, too many to name here. For this reason, we have omitted certain extra sub-categories in the contract bond section.
Contract Bond Sub-categories
Common sub-categories for contract bonds are:
Performance Bonds – These bonds guarantee that contractors will fulfill project contracts according to agreed-upon terms. Often, contractors are required to get these bonds before they can start working on a project.
Subdivision Bonds, Completion Bonds, Improvement Bonds, or Plat Bonds – These are used to ensure that civil improvements will be completed and that all rules and regulations within the project’s jurisdiction will be followed. These are a type of performance bond, except that performance bonds provide greater protection for the principal and the surety than subdivision bonds do.
Note, an additional sub-category for Subdivision Bonds, Completion Bonds, Improvement Bonds, or Plat Bonds is:
- Site Improvement Bonds – They are used to ensure that civil improvements will be performed according to set terms. These bonds differ from subdivision bonds in one key respect. Site improvement bonds apply to existing public works, whereas subdivision bonds apply to new ones.
Construction Bonds – They provide protections and assurances for a wide range of construction projects. Construction bonds is a general term. Many contract bond types can be used for construction bonds. For example, a performance bond may be required on a construction project.
Contractor License Bonds – They ensure compliance with all rules and regulations within a given jurisdiction, as well as guarantee good faith practices.
Payment Bonds – These bonds are used to make sure material suppliers and subcontractors are paid for their work according to agreed-upon terms in the project contract.
Bid Bonds – These bonds are used on bidding projects. They ensure that bids are made in good faith, are accurate, and will be followed up by a performance bond.
An additional sub-category for Bid Bonds is:
- Bid Protest Bonds – They guarantee that a bid protest is not wrongful and will not hinder the fulfillment of the vendor’s contract. For example, if the vendor (let us call them Neighborhood Association One) wants a new street built, the bid protest bond guarantees that the losing contractor’s protest will not interfere with the winning contractor’s work or deadline. Bid protests happen when a company loses a contract to a competitor and subsequently challenges the award.
Maintenance or Warranty Bonds – These bonds guarantee that maintenance and warranty upkeep of a project will continue for a predetermined period of time after a project has been completed.
Supply Bonds – They guarantee that suppliers will deliver materials as agreed upon in the contract. These bonds are often used to ensure that delivery prices remain the same and that deliveries arrive on schedule and without interruptions.
Other Types of Bonds
VA Fiduciary Bond – They protect veterans from malicious acts by fiduciaries and are used when beneficiaries are not able to oversee their own benefits. These bonds are often required by the government.
Lost Instrument Bonds or Lost Note Bonds – They are used when financial instruments are lost or stolen. For example, if a bank issues a cashier’s check that gets lost or stolen, the bank may require that the intended recipient of the check get a Lost Instrument Bond or Lost Note Bond, guaranteeing they won’t cash the original check if it is found. These bonds are used because institutions are legally responsible for the checks they issue. There are two types of lost instrument bonds, open penalty and fixed penalty.
Release of Lien Bonds – These bonds remove property liens. They are used to satisfy creditors when a debt is owed by the debtor (principal), ensuring compensation for unpaid debts on a given property.
Sales Tax Bonds – They guarantee that businesses will pay, as well as accurately report, sales taxes. These bonds are often required before a business can get a business license. There are several types of sale tax bonds, such as alcohol bonds.
Wage and Welfare Bonds – They are used by unions to ensure that employers pay union dues, as well as employee wages.
Our carrier is CNA Financial.
If you would like more information, check out our home page or call us at Las Vegas: (702) 850-7711 / Memphis: (901) 306-8100. We would love to talk with you!