Surety FAQ Series Part 7: What is the cost of a surety bond?

cost of a surety bond

Updated May 2018: Check out the most up-to-date information at Surety Bond Rates – FAQ

In an effort to help consumers better understand the niche surety industry, Insider contributors have created a 7-part series answering the most popular surety questions. In the 7th and final piece, we will be taking a look at the cost of a surety bond and how it is determined, as the premium someone can expect to pay varies greatly depending on the bond type.

The cost of a surety bond is determined by underwriters who look at a variety of information, including the applicant’s credit and the frequency with which claims are filed against the type of bond being issued. Because bonds are considered “zero-risk,” underwriters try to ensure that the principal is able to financially handle a claim.

The money paid for a surety bond is called the premium, and it is always a percentage of the total bond amount. By paying the premium to the surety company, they are guaranteeing to the obligee that the full bond amount is available in the event of a claim. Paying the premium also removes the burden from the principal of having to set aside the full amount of the bond, which is often financially unrealistic.

Like insurance policies, some bonds are inherently more risky than others—a fact taken into account by underwriters when determining a quote. For example, the likelihood of a claim against a contractor is much greater than a claim against a notary and, therefore, the premium that the contractor pays for their bond will be greater than that paid by the notary.

There are some bonds that underwriters determine to be so unlikely to be claimed against, that surety companies will freely write them without any kind of credit check. These bonds are generally issued for a set premium as well. Missouri notary bonds are an example of freely written bonds because they may all be issued instantly for just $50 without submitting an application to the underwriter.

While there are bonds that may be issued without explicit approval from the underwriter, the vast majority of bonds will require that an application is submitted for the underwriter to approve or deny. Many times, an approval may be granted solely by looking at an applicant’s credit score, however, there are some specific bonds, like freight broker license bonds, that will require the submission of additional information, including business and/or personal financial information.  The underwriting process is required on bonds that carry with them a greater likelihood of claims so that the financial solvency of the applicant is verified as being adequate to handle the cost of a claim. For applicants with excellent credit, paying just 1-3% of the total bond amount is a realistic expectation, while those with poor to decent credit will be faced with higher premiums—typically starting at 4%. Again, sureties write bonds with the assumption that they will incur no loss as a result of a claim against a bond that they issued and expect the principal to be able to fully reimburse them for any money that the surety pays to settle a claim.

So, when asking “what is the cost of a surety bond?” it is important to understand that it really depends on the type of bond that is being sought. An instant issue bond is generally available for a small premium, while the cost of an underwritten bond depends almost entirely on the applicant and their credit score. The best way to find out exactly what you’ll pay for your surety bond is to submit an application or give SuretyBonds.com a call at 1 (800) 308-4358 and request your free, no-obligation quote from a surety expert.

 

About the Author

Jon Gottschalk
Jon Gottschalk is the Senior Marketing Director for Suretybonds.com and regularly blogs at the Surety Bond Insider to keep consumers informed on new legislation and updates in the commercial surety industry. He is also a licensed property & casualty insurance producer in Missouri.