A Starter's Guide to Surety Bonds

What's a surety bond, you ask? Well, you've come to the right place. Welcome to Surety Bonds 101.

Surety bonds are essential in protecting businesses. The bonds are an agreement between three parties to guarantee that the principal party fulfills his or her contractual obligations. The surety provider (typically an insurance company) issues a surety bond to the principal party as part of the contractual agreement. This protects the obligee — for instance, a contractor's client or government agency — if the contract is breached. The obligee is protected if the principal fails to fulfill the contractual agreement or accrues unexpected expenses. The obligee can file a claim against the contract surety bond to receive financial compensation for damages.

The Two Types of Surety Bonds

According to RPS VP Aaron Bruggeman, surety bonds can be broadly categorized into two main types: contract bonds and commercial bonds.

Contract Bonds

Contract bonds are typically used in construction projects and involve three main types:

• Bid bonds ensure that contractors can fulfill the contract's obligations and provide contract bonds before work begins.
• Performance bonds guarantee that the contractor will complete the project according to the contract terms. If the contractor defaults, the bond compensates the project owner.
• Payment bonds ensure that the contractor will pay its subcontractors and suppliers and protect against liens on the property.

"Contract bonds are critical in projects involving public funds, such as government contracts, where taxpayer money is at stake," explains Bruggeman. "They safeguard the financial interests of the project owner, often a government entity, by ensuring that the contractor adheres to contractual obligations."

Commercial Bonds

Commercial bonds are more varied and apply across different industries. Here are a few examples:

• Contractor's license bonds (CLB): Most states require these bonds, which guarantee that contractors will operate according to their local laws and regulations. They're essential for obtaining a contractor's license.
• Motor vehicle dealer (MVD) bonds: Auto dealers need these bonds to comply with industry regulations and protect against fraudulent activities.
• Sales tax bonds: Businesses that collect sales tax may need these bonds to ensure they remit taxes correctly to the state.
• Probate bonds: These bonds are required for individuals who administer estates to ensure they'll manage the estate according to the law and court directives.
• Lottery bonds: Convenience stores and other retailers selling lottery tickets need these bonds to guarantee they comply with state regulations and to protect against fraud.

Navigating Challenges in Bond Markets

Agents often encounter clients with challenging bond requirements. These challenges might stem from the type of bond needed or the client's financial situation.

"For example, bonds like the BMC-84 for freight brokers are currently difficult to secure due to market conditions. Agents may struggle to find a market willing to write these bonds. Startups often face difficulty securing bonds due to a lack of financial history or lower credit scores. In addition, large bond amounts may be difficult to place in some markets," says Bruggeman.

This difficult is where RPS steps in. With access to surplus markets and in-house underwriting authority, we can handle even the most challenging cases. For example, we evaluate the "three Cs" — character, capacity, and capital — for contract bonds to determine if the contractor can handle the project. These criteria help assess whether the contractor has the financial stability, experience and reliability to complete the job.

Agents Can Benefit From Offering Bonds in Addition to Insurance

Incorporating surety bonds into their offerings is a natural extension for insurance agents, particularly if they already serve industries like construction, automotive or retail.

"By offering bonds alongside insurance products, agents can capture more of their clients' business and increase revenue, enhance client relationships as they become more integral to their clients' operations, and distinguish themselves from the competition," Bruggeman says.

Some Tips for Agents New to Surety Bonds

Ready to dip your toes into the surety bond world? Start with these strategies:

• Ask about bonds: When discussing insurance needs with clients, always ask if they require any bonds. This advice is particularly important in construction, trucking and retail industries, where bonds are often mandatory.
• Leverage expertise: RPS provides agents with a team of bond experts who handle the underwriting process and ensure the proper bond is placed. Agents don't need to be bond experts — they just need to contact us for assistance.
• Understand the market: Different states have different bonding requirements. Partnering with RPS ensures access to markets that might otherwise be difficult to tap into.

Still unsure? Never fear — RPS is always standing by to answer questions and assist you with your clients' bonds.