The concept of how surety bonds work is simple to comprehend on the surface. Surety bonds are promises to pay in the event you are required to pay out for a wide variety of reasons. The nuances and details about how surety bonds work is quite a bit more involved, however, and depends largely on the type of bond you purchase and the state in which you live. 

The exact manner in which a surety bond works is also dependent upon what it actually covers. Perhaps the simplest surety bond to explain is one written for self-insurance automobile plans. A surety bond purchased as an alternative to liability car insurance is a means of financial responsibility if you are the at-fault driver who causes an accident. For example, the minimum amount of liability coverage in New York State is $25,000.

Surety Bonds: How Do They Work and What Do They Cover?

Purchasing a surety bond to replace your liability auto coverage requires purchasing a bond valued at $25,000+ plus other conditions. If you cause an accident, the funds to pay for damages, medical and other expenses as a result of the accident are paid out from your total surety bond amount.

What else does surety bond insurance cover? Bid bonds protect owners when a bidder wins a contract bid but refuses to sign, deliver services or pay as required. Performance bonds force completion when a contractor defaults. 

Payment bonds ensure labor & material costs are paid for as specified in various construction contracts. Warranty bonds protect owners against defective workmanship and materials. 

What do commercial surety bonds cover? The cover the following: 

  • Miscellaneous bonds include warehouse, title, utility, fuel tax-based bonds and more.
  • Public official bonds protect the public from misdeeds done by specific members of public office.
  • Fiduciary/probate bonds include executor, administrator, trustee, guardian & conservator bonds, all of which are required by those handling trust funds/accounts while under the supervision of court.
  • Court/judicial bonds reserve the rights of opposing litigants or alternately interested parties in judicial proceedings. These bonds apply to both plaintiffs & defendants. 
  • License-and-permit bonds also include a variety of further categorized bond types and are required as conditions of obtaining various licenses and permits for government positions/situations.