What Are Surety Bonds?

A Detailed Guide to Contract, Commercial, and Fidelity Bonds

Surety bonds are essential financial tools that promote trust, accountability, and performance in business and construction. They protect project owners, consumers, and the public from financial loss by ensuring that businesses fulfill their legal or contractual obligations.

At Oakbrook Insurance Agency, we help contractors, developers, and businesses nationwide secure the surety and fidelity bonds they need to operate, compete, and grow with confidence.

Understanding the Basics: How Surety Bonds Work

A surety bond is a three-party agreement involving:

• The Principal: The person or company required to obtain the bond, such as a contractor, licensee, or business.

• The Obligee: The entity requiring the bond, such as a project owner, government agency, or court.

• The Surety: The bonding company that guarantees the principal’s performance and financial responsibility.

If the principal fails to perform, the surety compensates the obligee for the loss, and then seeks reimbursement from the principal. This means a surety bond is not traditional insurance, but rather a financial guarantee that holds the principal accountable.

Surety bonds generally fall into three main categories: Contract Surety Bonds, Commercial Surety Bonds, and Fidelity Bonds.

The Impact of the Miller Act on the Growth of Surety Bonds

The modern surety bond industry owes much of its structure and growth to the Miller Act of 1935, a landmark federal law that established bonding requirements for public construction projects in the United States. Before the Miller Act, federal projects frequently suffered from contractor defaults and unpaid subcontractors, leading to costly delays and disputes.

The Miller Act mandated that any contractor awarded a federal construction contract exceeding $100,000 must furnish both a performance bond and a payment bond. The performance bond guarantees completion of the project according to contract terms, while the payment bond ensures that all subcontractors and suppliers are paid in full.

This legislation provided critical protection for taxpayers, subcontractors, and suppliers, and it set the standard for state and local governments, many of which later passed their ow

Over time, these laws became the foundation for the widespread use of surety bonds across both public and private construction sectors, reinforcing confidence in large-scale infrastructure and development projects.

1. Contract Surety Bonds

Contract surety bonds are used primarily in the construction and engineering industries. They ensure that contractors meet the terms of their contracts, complete projects as promised, and pay all laborers and suppliers. These bonds are typically required on public works projects and are increasingly common in private construction, renewable energy development, and large-scale infrastructure. The following list details different types of contract surety bonds.

Bid Bonds guarantee that a contractor who submits a bid will enter into the contract and provide the necessary performance and payment bonds if awarded the job.

• When required: During the bidding phase of most public projects, including highway construction, school buildings, municipal utilities, and renewable energy installations such as solar parks or wind farms.

• Why it matters: It prevents unqualified contractors from submitting low bids they cannot honor, thereby protecting the project owner from financial disruption.

Performance Bonds guarantee that the contractor will complete the project according to the contract’s terms, specifications, and deadlines.

• When required: Upon contract award for nearly all public projects, as well as many large private developments.

• Example: A city requires a $5 million performance bond from a contractor building a wastewater treatment facility to ensure timely completion to code.

• Why it matters: If the contractor defaults, the surety steps in to arrange completion, minimizing delays and cost overruns.

Payment Bonds ensure that subcontractors, suppliers, and laborers are paid for their work and materials.

• When required: Alongside performance bonds on federally and state-funded construction projects, as mandated under the Miller Act and corresponding state “Little Miller Acts.”

• Example: A general contractor building a solar farm must furnish a payment bond to protect the panel suppliers and electrical subcontractors.

• Why it matters: It prevents liens and financial disputes that can stall or jeopardize projects.

Maintenance (Warranty) Bonds guarantee the contractor will remedy defects in workmanship or materials that arise after project completion, typically for one to two years.

• When required: At the end of project completion, especially for infrastructure, public works, or renewable energy installations.

• Example: A maintenance bond covers potential wiring or inverter defects discovered after a solar project’s commissioning.

2. Commercial Surety Bonds

Commercial surety bonds are used outside the construction industry to ensure compliance with legal, regulatory, or contractual obligations. They protect consumers, government entities, and the public from financial harm caused by misconduct or failure to comply with laws. The following list details different types of commercial surety bonds.

License and Permit Bonds are required by federal, state, or local governments as a condition of obtaining a business license or operating permit.

• Who needs them: Auto dealers, mortgage brokers, contractors, freight brokers, insurance adjusters, collection agencies, and many others.

• Example: A contractor license bond ensures a homebuilder complies with state construction codes; a motor vehicle dealer bond protects consumers against fraudulent title transfers.

Court Bonds ensure compliance with judicial orders and protect parties involved in legal proceedings.

• Types include:

  • Appeal Bonds: Guarantee payment of a judgment if the appeal is unsuccessful.

  • Probate Bonds: Required of executors or guardians to ensure faithful handling of an estate.

  • Injunction Bonds: Protect defendants from wrongful injunctions.

• Example: An executor managing a large estate must obtain a probate bond before accessing funds to demonstrate financial accountability.

Public Official Bonds guarantee that public officials perform their duties honestly and in accordance with the law.

• Who needs them: Treasurers, tax collectors, notaries, judges, and other elected or appointed officials.

• Example: A city treasurer must be bonded to ensure that public funds are managed correctly.

Miscellaneous Commercial Bonds cover a variety of non-construction obligations not classified elsewhere.

• Examples:

  • Utility Deposit Bonds: Guarantee payment for commercial utility accounts.

  • Lost Instrument Bonds: Replace lost financial documents such as stock certificates or checks.

  • Customs Bonds: Required by importers to guarantee payment of duties and compliance with customs regulations.

3. Fidelity Bonds

Fidelity bonds protect a business from financial loss due to employee dishonesty, theft, or fraud. Unlike traditional surety bonds, fidelity bonds function more like insurance coverage for the employer. The following list details different types of fidelity bonds.

Employee Dishonesty Bonds cover losses caused by theft, embezzlement, or forgery committed by employees.

• Example: A bookkeeper at a construction firm embezzles project funds; an employee dishonesty bond covers the loss.

ERISA Bonds are required under the Employee Retirement Income Security Act ("ERISA") for companies that manage employee benefit or pension plans.

• Purpose: These bonds protect plan participants against theft or misuse of funds by fiduciaries or administrators.

Business Service Bonds protect clients from theft or property damage caused by a bonded company’s employees while working on-site.

• Who needs them: Janitorial, cleaning, home service, and moving companies that send employees to client premises.

• Example: A cleaning company’s employee steals from a client’s home; coverage applies under the business service bond.

How Oakbrook Insurance Agency Can Help With Your Bonding Needs

Navigating bonding requirements can be complex, especially when multiple types of bonds are needed for different obligations. The team at Oakbrook Insurance Agency brings deep expertise in contract, commercial, and fidelity bonds, serving clients across construction, energy, finance, and service industries.

We provide:

• Access to top-rated national surety carriers

• Competitive rates and fast turnaround times

• Expert assistance with applications and underwriting

• Ongoing support for renewals and compliance

Whether you are bidding on a public works project, applying for a professional license, or safeguarding your business from employee risk, Oakbrook ensures you have the right bond for your needs.

Partner with Oakbrook Insurance Agency

Your credibility and financial security depend on the bonds you choose. Trust Oakbrook Insurance Agency to deliver expert guidance, personalized service, and reliable bonding solutions that keep your business moving forward. Contact Oakbrook Insurance Agency (info@oakbrookagency.com) today to discuss your bonding requirements or request a consultation.