Types of Surety Bonds Explained
“Surety bond” is an umbrella term covering several very different instruments — here is how the main categories sort out.
License and permit bonds
These are commonly required before a government agency will issue a license or permit. They are generally intended to guarantee that the licensed party will follow the laws and regulations governing their trade or activity.
Contractors, auto dealers, mortgage brokers, and many other regulated businesses may be required to obtain one as a condition of operating legally.
Contract bonds: performance and payment
Contract bonds typically appear on construction and similar projects, and they often come as a pair.
- Performance bond. Generally intended to guarantee that the contractor will complete the project according to the contract terms.
- Payment bond. Generally intended to guarantee that subcontractors, laborers, and material suppliers are paid.
- Bid bond. A related contract bond that commonly guarantees a contractor will honor its bid and enter the contract if selected.
Fidelity bonds
Fidelity bonds sit slightly apart from the others. They are generally intended to address losses caused by dishonest acts of employees, such as theft or embezzlement.
Because they protect a business against its own employees rather than guaranteeing an external obligation, fidelity bonds behave a little more like a protective product, though they are still issued in the surety family.
Court and fiduciary bonds
Court bonds are commonly required in connection with legal proceedings. Fiduciary bonds, for example, may be required of an executor or guardian to guarantee they will faithfully manage assets entrusted to them. Other court bonds, such as appeal or injunction bonds, arise from specific litigation steps.
Across all of these categories, the same principle applies: the bond protects the obligee, and the principal is generally expected to repay the surety for any valid claim it pays. A licensed insurance professional can help match a specific requirement to the correct bond type.
Frequently asked questions
How do I know which bond type I need?
Usually the entity requiring the bond — a licensing board, project owner, or court — specifies the exact bond and amount. Start with their written requirement and match it to the category.
Is a fidelity bond the same as a license bond?
No. A license bond guarantees compliance with regulations to a government obligee, while a fidelity bond addresses losses from dishonest employee acts. They serve different purposes.
Do all of these require repayment to the surety?
As a general rule, yes. Across surety bond types, the principal is expected to reimburse the surety for valid claims paid, which is what distinguishes a bond from insurance.
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