Surety Bond Glossary
Every bond term you'll run into, defined in plain language. No industry jargon, no legalese. Bookmark this page — you'll come back to it.
B
Bid Bond
A surety bond submitted with a project bid that guarantees the bidder will honor their bid price and enter into a contract if awarded the project. Protects project owners from frivolous bids.
Bond Amount
The maximum amount of coverage the bond provides — the most the surety will pay on a claim. This is not what you pay. Your premium is a percentage of the bond amount.
Broker Commission
The percentage of your bond premium that goes to the insurance broker or agent who placed the bond. Commercial surety commissions typically range from 10-40% of the premium, with 25-30% being common.
C
Claim
A formal demand by the obligee for the surety to make payment under the bond due to the principal's failure to meet their obligation. If the claim is valid, the surety pays and then seeks reimbursement from the principal.
Commercial Bond
A broad category of surety bonds required by government entities for licensing, permitting, and regulatory compliance. Includes license bonds, permit bonds, court bonds, and other non-construction bonds.
Contingent Commission
An additional commission paid to brokers based on the profitability of the business they placed. On top of the base commission, this rewards brokers when claims are low — essentially a bonus funded by your premiums.
Contract Bond
A category of surety bonds used in construction, including performance bonds, payment bonds, and bid bonds. These guarantee that contractors will fulfill their contractual obligations on a project.
Court Bond
A surety bond required by a court as part of legal proceedings, such as an appeal bond (supersedeas bond), guardianship bond, or administrator bond. Guarantees compliance with court orders.
Customs Bond
A surety bond required by U.S. Customs and Border Protection for importing goods into the United States. Guarantees payment of duties, taxes, and fees, and compliance with import regulations.
F
Fidelity Bond
An insurance product that protects a business from financial losses caused by dishonest acts of its employees, such as theft, fraud, or forgery. Unlike surety bonds, fidelity bonds protect the bond purchaser, not a third party.
I
Indemnity Agreement
A contract signed by the principal (and often personal guarantors) agreeing to reimburse the surety for any claims paid on the bond. This makes surety bonds fundamentally different from insurance — you're always on the hook.
L
License Bond
A surety bond required by a state or local government as a condition of obtaining a business license. Protects the public from financial harm caused by the licensed business's failure to comply with regulations.
O
Obligee
The party that requires the bond and is protected by it. Typically a government agency, project owner, or court. If the principal fails to meet their obligation, the obligee can file a claim against the bond.
Obligee Requirement
The specific bond type, amount, and conditions mandated by the party requiring the bond. You don't choose your bond amount — the obligee tells you what's required.
P
Payment Bond
A surety bond that guarantees a contractor will pay their subcontractors, laborers, and material suppliers. Often required alongside a performance bond on public construction projects.
Penal Sum
Another term for the bond amount — the maximum liability of the surety under the bond. The penal sum represents the most the surety will pay out on a single claim or the aggregate of all claims.
Performance Bond
A surety bond that guarantees a contractor will complete a project according to the terms of the contract. If the contractor fails, the surety either finds another contractor or compensates the project owner.
Permit Bond
A surety bond required before a permit is issued for certain types of work or activity. Similar to license bonds but tied to specific permits rather than ongoing licenses.
Personal Guarantee
A requirement in most surety bond indemnity agreements where the business owner personally guarantees repayment if the surety pays a claim. Your personal assets are at risk, not just the business.
Principal
The business or individual who purchases the surety bond and whose performance or obligation is being guaranteed. The principal is ultimately responsible for any claims paid by the surety.
Processing Fee
An additional fee charged by some brokers on top of their commission, ostensibly covering administrative costs of processing the bond application. Often duplicates work already covered by the commission.
S
SBA Bond Guarantee Program
A federal program where the Small Business Administration guarantees bid, payment, and performance bonds for small and emerging contractors who cannot obtain surety bonds through regular channels. Covers contracts up to $6.5 million.
Subagent
A secondary broker or agent who refers bond business to a primary agent in exchange for a portion of the commission. Adds another layer of fees between you and the carrier.
Supersedeas Bond
A type of court bond required to appeal a court judgment. The bond amount typically equals the judgment amount plus interest and costs, guaranteeing payment if the appeal fails.
Surety
The insurance company that issues the bond and guarantees the principal's performance. If a valid claim is filed, the surety pays the obligee and then seeks reimbursement from the principal.
Surety Association of America (SFAA)
The national trade association representing surety companies. Publishes industry data, model bond forms, and advocated for surety industry interests. A primary source for market statistics and underwriting standards.
Surety Bond
A three-party agreement where the surety (insurance company) guarantees to the obligee (the party requiring the bond) that the principal (the business) will fulfill its obligations. If the principal fails, the surety pays the claim and the principal owes the surety back.
T
Treasury List
The U.S. Department of the Treasury's list of approved surety companies authorized to provide bonds on federal projects. Also called Circular 570. Only listed companies can write federal bonds.
U
Underwriting
The process by which a surety evaluates a bond application to determine whether to issue the bond and at what premium rate. Underwriters assess credit history, financial statements, industry experience, and bond type.