What is Bond Insurance?

What is the meaning of bond insurance? Bond insurance, also known as financial guarantee insurance, is a legal agreement between the entity purchasing the bond, the person who receives the bond benefit, and the insurance party. In other words, it is a contract between the principal, an obligee, and the surety.

What is Bond Insurance

It is a type of insurance where an insurer helps to guarantee the payment of interest and principal scheduled on a bond. In the event that the person who purchases the bond fails to meet the agreement, just so you know, we can’t say bonds are insurance policies; they are legal contracts. They are between three parties that promise restitution to the obligee if the principal defaults on the agreement. We have two main types of bond insurance that have sub-types. And help protect against different cases; Fidelity bonds and surety bonds

How Does It Work?

Just like I have mentioned above, a surety bond is a legal contract between three parties. The principal (the business owner buying the bond), the obligee (the customer that is requesting the bond), and the surety (the insurance company that helps underwrite the bonds). 

Bond insurance helps to guarantee the client that they will be refunded if the business owner fails to fulfill its services (surety bonds). Or if a worker of the business owner commits a crime against the client, like theft (a fidelity bond).  The entity purchases it and pays a premium for it in return, and this will cover the loss. It is designed to provide financial backing for the business owner, which benefits all three parties involved.

  • Obligees (clients) can be assured that they will not suffer any loss if the principal does not meet their obligations at the end of the day. It also assures the obligees that the insurer will pay them on their behalf if the agreement is not met.
  • The surety (insurer) benefits by charging the principal for the price of the legal contract. Even if they have to cover the loss, the principal will pay it back in the form of a premium.
  • The principal (business owner) can move forward with the work, knowing fully that credit is available if it breaches its contracts for any reason.

This will help boost the business because clients will see that it is legitimate and does not have anything to lose.

What Does Bond Insurance Not Cover?

Bonds are made solely to help cover your customer problems in cases like poor workmanship or incomplete jobs. It does not provide any coverage for judgment, medical expenses, legal defense, or settlements. This type of insurance provides a scope of protection and is very different from investment bonds. It is made for liability coverage, unlike other insurance policies.

Benefits of Bond Insurance

If you own a small business that does work for others, a bond can help you boost your legitimacy. It helps to assure consumers that their work will be finished. And if your work is not sufficient, your customer won’t have to deal with a large bill for your work. Most customers require a bond before they can agree to do business with you. Without one, you may not get the job.

When Do I Need Bond Insurance for My Small Business?

You may need it for your small business when a customer requires it or when your industry requires it. Also, you must concur with the federal, state, or local law. For instance, if you have a cleaning business, your customer may ask you to have a janitorial bond to add to your cleaning business insurance.

Difference Between an Insurance Policy and Bond Insurance

Bonds are not technically insurance policies. An insurance policy is an agreement between the insurance company and the insured (you). The insurer agrees to make payments for certain claims in return for you paying an agreed premium. Meanwhile, an insurance bond is not created to pay for claims.

It helps to provide a financial guarantee that the business owner purchasing the bond will repay the obligee should the person fail to fulfill the claim or obligations made. We can say that the bond is meant to support the stability of the person purchasing it. In most cases, it is made to work as a protection in case the purchase is not able to meet the terms of the agreement.

Where Can I Get Bond Insurance?

Do you want an insurance bond for your small business? You can easily get one at:

  • Surety Bond Companies: You can check out surety companies for this insurance. The Small Business Administration has helped provide a list of companies that provide it.
  • Business insurance companies: Some business insurance companies sell different types of bonds, like license and permit bonds and performance, bid, and payment bids.

Also, you can go online and check the United States Bureau of the Fiscal Service’s list of certified companies.

How Much Does It Cost?

When it comes to the price, we cannot give you a definite price. And the reason is because they are different types. Also, the prices are based on different factors. Some of these factors include the type of bonds needed, the size of your team, your experience in the industry, your credit score, the financial stability of the business owner, and more. Mostly, it depends on the contract amount between the principal and the client. It always costs somewhere between 20% and 25% of the value of the contract.


Bonds are a form of risk management that ensures that you meet all the obligations of your business properly. We have different types of bonds and just say that you might need them. You can reach out to your insurance agent today to talk about your situation and get exactly what you need. While you are giving it a thought to contact your agent, this might also be a good time to review your whole business. And make sure you don’t have other spaces you need protection for in your business.