Insurance is a contract between you and an insurer, and it presumes some level of losses. A surety bond is a guarantee: a third party, the surety, promises an owner, a licensing board or a court that you will do what you agreed to, and if it has to pay, you pay it back. That is why a bond never protects you; it protects the people on the other side of your obligation. Contractors meet bonds as bid, performance and payment bonds on public work, and as license bonds that boards require before issuing a license. Underwriting looks like a loan application, not a policy quote: financial statements, credit, experience and a signed promise to repay the surety.
Three parties instead of two
An insurance policy has two parties: you and the insurer. You pay a premium, the insurer pays covered losses, and, as NASBP puts it, traditional insurance presumes some level of losses.
A surety bond has three. The principal is the business whose obligation is being guaranteed: in construction, the contractor, subcontractor or supplier. The obligee is the party the bond is given to and protects: a project owner, a prime contractor, a government agency such as a licensing board, or a court. The surety is the company that promises to be liable for the principal’s debt, default or failure. It does not assume the obligation; it is secondarily liable and steps in only if the principal defaults.
You pay the surety back
When an insurer pays a covered claim, you do not owe the money back. When a surety pays on a bond, it expects the principal to repay every dollar. Before issuing any bond the surety takes a signed general agreement of indemnity, and NASBP says the owners who control the company, and their spouses, almost always sign too. NASBP states the principle plainly: a surety does not expect to suffer losses, because it expects the principal to perform and it holds that indemnity.
That is why NASBP says getting a bond is more like getting bank credit than buying insurance, and why a bond never protects the principal. Your own protection comes from general liability and the rest of your insurance program, not from the bond.
Contract bonds, commercial bonds and the fidelity exception
- Bid bond. Protects the obligee, usually the owner, if the winning bidder fails to sign the contract or provide the performance and payment bonds that go with it.
- Performance bond. If the contractor defaults, the surety can be called on to complete the contract, or cause it to be completed, according to its terms.
- Payment bond. Guarantees that certain subcontractors and suppliers are paid for labor and materials incorporated into the project if the principal does not.
Commercial surety is the other family, and SFAA describes it as protecting the public against fraud, misrepresentation and financial risk: license and permit bonds that a law, ordinance or regulation requires before you can get a license or permit, fiduciary bonds for executors, guardians and trustees answering to a court, judicial bonds such as appeal and injunction bonds that protect the other side in a lawsuit, and public official bonds for officials in positions of trust.
A fidelity bond is the exception. SFAA notes it began as a three-party surety bond guaranteeing an employee’s honesty, but today it is a two-party insurance policy: employee dishonesty insurance, also sold as a commercial crime policy. Someone asking you for a fidelity bond is asking for insurance.
Why owners and licensing boards require bonds
NASBP gives two reasons owners require bonds: prequalification, since a surety has already vetted the contractor, and financial protection if it defaults. The federal Miller Act, 40 U.S.C. 3131, requires, before a federal construction contract is awarded, a performance bond protecting the government and a payment bond protecting everyone supplying labor and material. The statute sets the line at contracts over $100,000; the Federal Acquisition Regulation requires the bonds on construction contracts over $150,000 and, between $35,000 and $150,000, allows alternative payment protections such as an irrevocable letter of credit in place of a payment bond.
Every state has a Little Miller Act for its own public works, with its own threshold. Florida’s is section 255.05: a contractor on a public work for the state, a county, a city or another public authority must execute and record a payment and performance bond equal to the contract price. No bond is required on state work of $100,000 or less, and a county or city may exempt a contract of $200,000 or less at its discretion.
License bond amounts also vary by state. California’s Contractors State License Board requires a $25,000 contractor’s bond under Business and Professions Code 7071.6 before it will issue, reactivate or renew an active license, to protect consumers hurt by defective work or license-law violations, and employees owed wages. Washington’s Department of Labor & Industries requires a $30,000 bond for general contractors and $15,000 for specialty contractors, amounts in effect since July 1, 2024, and accepts an assignment of account (cash, a certificate of deposit, a time deposit or a money market account at a Washington bank, savings and loan or credit union) instead. More on contractor license bonds.
What the surety looks at and what to have ready
Because the surety expects to be repaid, it underwrites you like a lender. The SBA lists the test as the surety’s credit, capacity and character requirements. NASBP describes the surety analyzing a contractor’s operations, financial resources, experience, workload, management and profitability. For contract bonds, NASBP’s list of what a bond producer collects:
- Fiscal year-end financial statements for the past three years, plus a current interim statement with aged receivables and payables.
- Bank loan agreements, including lines of credit, and personal financial statements for the owners of a closely held company.
- A current work-in-progress report.
- Résumés of owners and key employees, letters of recommendation and evidence of current insurance.
- A contractor’s questionnaire and copies of the contracts you want bonded.
Small businesses that might not meet another surety’s criteria may fit the SBA Surety Bond Guarantee Program, which backs bid, performance, payment and ancillary bonds, not commercial bonds, on contracts up to $9 million (non-federal) and $14 million (federal). More on surety bonds and contractor insurance.
Common questions
Does a surety bond protect my business?
No. It protects the obligee: the owner on a performance bond, subcontractors and suppliers on a payment bond, the public on a license bond. Your own protection comes from your insurance policies.
If the surety pays a claim, do I owe the money back?
Yes. You sign a general agreement of indemnity before the surety issues any bond, and NASBP says the owners who control the company and their spouses are almost always required to sign as well. The surety expects to be paid back for every dollar, which is the core difference from insurance, where a paid claim is not owed back.
Is a fidelity bond a surety bond?
Not anymore. SFAA notes fidelity bonds began as three-party surety bonds guaranteeing an employee’s honesty, but today they are two-party insurance policies covering employee dishonesty, often sold as commercial crime coverage.
When does federal work require bonds?
The Miller Act, 40 U.S.C. 3131, requires performance and payment bonds on federal construction contracts above the statutory amount, $100,000 in the statute. The Federal Acquisition Regulation applies the requirement at contracts over $150,000 and provides alternative payment protections for contracts between $35,000 and $150,000.
Do private construction jobs require bonds?
No law requires them on private work. Many private owners, prime contractors and construction lenders require performance and payment bonds anyway, and state Little Miller Acts and licensing boards require them on public work and for licenses, with thresholds and amounts that vary by state.
Sources
- 40 U.S.C. 3131 (Cornell LII): bonds of contractors of public buildings or works (Miller Act)
- FAR 28.102-1 (acquisition.gov): Miller Act bond threshold and alternative payment protections
- Florida Statutes 255.05 (Florida Senate): bond of contractor constructing public buildings
- SBA: Surety Bond Guarantee Program, bond types, eligibility and contract limits
- NASBP: Answers to 32 Questions Public and Private Owners Ask About Contract Bonding (PDF)
- Surety & Fidelity Association of America: What is surety?
- Surety & Fidelity Association of America: What is fidelity?
- California Contractors State License Board: bond requirements
- Washington Department of Labor & Industries: register as a contractor (bond amounts)
General information about surety bonds and how they differ from insurance as of October 2026, not legal or tax advice; 40 U.S.C. 3131, the Federal Acquisition Regulation, each state’s public works and licensing statutes and the bond form itself control. Coverage depends on underwriting and the terms, conditions and exclusions of the policy actually issued.