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Surety Bond Insurance

Surety Bond Insurance

This is usually an agreement between three parties. An insurance company commits to pay an individual/company a certain amount of money if the policyholder breaches an agreement that he/she has with the individual/company. The individual who is tasked with fulfilling an agreement is called the principal. The party/ individual who is the recipient of the task is called the obligee. The individual/ party who guarantees the obligee that the task will be performed is called the surety. The surety is not necessarily an insurance company. It can be a bank or a surety providing institution.

Who is it for?

This policy is usually for companies that engage in contraction work such as building and construction companies. These companies usually take this insurance policy as an assurance to clients that they will complete the task as per the agreed terms. In case the policyholder defaults from the agreed terms the surety pays the client.

How does it work?

This insurance works similarly to life insurance. In this policy, a company agrees with an insurance provider or bank. The policyholder pays an agreed premium to the insurance provider. The bank/insurance provider agrees to guarantee the policyholder on an occasion that the holder is unable to fulfill the agreed terms with their clients. In cases of a claim, the insurance provider investigates to ascertain the validity. If the claim is valid, the bank pays the policyholder’s client. The insurance provider has a limit of the maximum amount that they can pay. This maximum sum is called the penal sum. The penal sum is calculated depending on the premiums paid.


Surety bonds are subdivided into two categories. These include:

1. Contractor Bonds.
In these bonds, the insurer guarantees the client that the contractor will conduct the task in adherence to the contract terms. They include: bid bonds, payment bonds, performance bonds, supply bonds and site improvement bonds.

2. Commercial Bonds.
These bonds include any guarantee that is not related to contracting/ construction. They include: License and permit surety bonds, Fidelity surety bonds, Fiduciary surety bonds, Court bonds, and Public official surety bonds.


This kind of insurance policy is crucial to contractors who engage in construction and supply work. A client is more comfortable dealing with a contractor who has a surety bond. The client can be assured that their task will be finished as agreed. This bond increases the credibility of the principal.