Surety Bond Glossary — Terms for Contractors and Licensees
Definitions of common surety bond terms, underwriting language, and construction bond concepts in plain English. Understanding these terms helps contractors, notaries, and business owners navigate the bonding process faster.
The Three Parties to a Surety Bond
- Principal: The contractor or licensee purchasing the bond and obligated to perform. You are the principal.
- Obligee: The government agency or project owner requiring the bond. Protects them against your non-performance or misconduct. Using the exact legal obligee name on your bond is critical.
- Surety: The insurance company (like RLI or Markel) that issues the bond and guarantees your obligations to the obligee.
Common Bond Types
- Bid Bond: Submitted with a construction bid — guarantees you'll enter the contract at the bid price if selected. Typically 5–10% of the bid amount.
- Performance Bond: Guarantees you'll complete the project per contract terms. Protects the owner if you default.
- Payment Bond: Guarantees you'll pay subcontractors and suppliers. Required alongside performance bonds on most public projects.
- License & Permit Bond: Required by state agencies as a condition of licensing. Common for contractors, dealers, notaries, and mortgage companies.
- Notary Bond: A $10,000 bond required by the Texas Secretary of State for all notary public commissions. Protects the public from notary errors or misconduct.
- Maintenance Bond: Guarantees correction of defective work after project completion. Typically covers 1–2 years post-acceptance.
Key Underwriting Terms
- Penal Sum: The maximum dollar amount the surety will pay. Equal to the contract amount on construction bonds; fixed by regulation on license bonds.
- Premium: The cost of the bond — typically a percentage of the penal sum. Not refundable if the bond is cancelled.
- Indemnity Agreement: You agree to reimburse the surety for any claims paid. The bond is not insurance for you — it protects the obligee.
- Single Limit: Maximum bonding capacity for one project. Aggregate Limit: Maximum bonding capacity across all active projects.
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