Surety bonds are insurance. But, they aren’t the same as your health insurance or business coverage.

Standard insurance policies protect your own assets. Surety bonds generally protect the assets of others. If you’re a contractor, you have an obligation to your clients. Think of bonds as insurance that guarantees a financial contract to a client.

Honor Your Commitment with a Bond

When make a contract, you promise to complete an assigned task to the client's specifications. The contract may include a bond requirement.

If you don’t complete your work, a bond requires you to compensate the client because you broke your contract. You will likely have to compensate the client within the terms of the bond. This usually includes a financial sum to help the client recover from your failure to complete a job.

A surety bond will provide a sum to compensate a client the way standard insurance policy might. The bond guarantees that you will provide the compensation within the contract. However, by agreeing to the bond, you promise to use your own assets to repay the bond company. In essence, the repayment is coming from you, it just goes to the bond company, not the client.

Choosing a Bond

Since you have to pay a bond if a client makes a claim against it, take the time to research how to properly secure a bond.

1. Meet the needs of the client: Many clients require contractors to carry bonds. If you have to secure a bond, make sure you buy one that meets the client’s minimum requirements. If a client doesn’t request a bond, it is usually still a good idea to carry one anyway.
2. Get the appropriate coverage: If you decide to offer bonds when you enter contracts, make sure the coverage of the bond covers the total estimated cost of the project. This will ensure that you adequately compensate a client for lost costs. It is likely a good idea that you over-buy coverage on a bond, to a reasonable extent. You can cover unforeseen losses outside the cost estimates you promise the client.
3. Don’t promise services you can’t offer: When a client makes a claim against your bond, you have to repay the bond company after they compensate the client. For that reason, don’t overestimate your assets on hand. Make sure you have the money to properly cover a client’s needs if you have to compensate them.

The goal of a bond is to properly cover a client’s needs. However, you can’t promise a client a bond if you can’t deliver the bond’s requirements. Doing so could expose you to legal risks.