Surety and Fidelity Bonds

Surety and fidelity bonds are 2 options to protect your business. While they’re both bonds, each serves a different purpose. Learn more about surety and fidelity bonds now.

Surety bonds are a legal instrument that guarantees the completion of a contract. Fidelity bonds are a type of surety bond that protects businesses from employee theft. 

Understanding Fidelity Bonds

Fidelity bonds are primarily used to protect your business from employee theft. Types of fidelity bonds include:

• Business service bonds: These bonds protect your business if a customer’s money, equipment or belongings are stolen by an employee. You might need this type of bond if you run a house cleaning business or a pet or house sitting service. 
• Standard employee dishonesty bonds: These protect your business from financial losses due to employee fraud or theft. They typically cover theft of money, securities and other property. This type of bond is worth considering for many businesses, including accounting firms, professional offices, medical offices and non-profits. 
• ERISA bonds: These bonds are for trustees of pension plans that fall under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA requires that trustees have fidelity bond coverage that equals at least 10% of the plan’s assets. The bond is required to protect plan participants from theft of their retirement savings.  

Fidelity bonds are either blanket fidelity bonds or schedule fidelity bonds. Blanket fidelity bonds cover all employees unless they’re specifically excluded. All employees are covered for the same amount. 

Schedule fidelity bonds cover specific employees named in the policy. Employees can be covered for different amounts. 

Understanding Surety Bonds

Surety bonds are a guarantee that work will be completed. According to the Small Business Administration, many public and private contracts require surety bonds, which you can purchase from surety companies. 

Surety bonds fall into 2 categories: contract surety bonds and commercial surety bonds. Contract surety bonds are for construction projects. There are different surety bonds for each step in the construction process. 

• Bid bonds protect the businesses during the bidding process. 
• Performance bonds protect businesses by ensuring contracted companies complete the work they agreed to. 
• Payment bonds ensure that the contracting company will pay its subcontractors and suppliers. 
• Warranty/maintenance bonds guarantee that the contracting company will repair any initial construction issues if the defect is found during the warranty period. 

Commercial surety bonds are bonds that aren’t related to construction. They include:

• License and permit bonds: These bonds are required for some types of professional licenses and permits and for doing specific types of work. Electricians, plumbers and contractors are all professionals who may need bonds. 
• Auto dealer bonds: These are required by auto dealers to ensure they comply with the law. 
• Lottery bonds: Businesses with lottery machines often need to purchase lottery bonds. 
• Notary public bonds: Notary publics are often required to purchase bonds due to the sensitive nature of the work they do. 
• Public official bonds: These bonds protect taxpayers by guaranteeing the performance of official duties. 
• Auctioneer bonds: Auctioneers and auction houses buy these bonds to protect bidders. 
• Fuel tax bonds: Fuel sellers are required to buy these bonds to guarantee they’ll pay taxes on the gas they sell. 
• Court bonds: These bonds are used for several purposes. Appeal bonds guarantee that an original judgment will be paid if an appeal is denied. Guardianship/custodian bonds ensure that a custodian will be responsible with their client’s finances. Probate bonds require executors to distribute the assets of a deceased person appropriately. 

Surety vs Fidelity Bond Qualifications

There aren’t set requirements for surety and fidelity bonds. The best approach is to work with an insurance company or bond broker. You’ll apply for the bond, and then your application will be reviewed by underwriters. 

The underwriters may ask you more questions about your business. They’ll consider factors like the size of the contract, the type of work being done, and the business’s financials. They’ll let you know whether your application has been approved or denied. 

Small businesses may want to get a surety bond guaranteed by the Small Business Administration (SBA). To qualify, you need to meet the SBA’s qualifications for a small business, have a federal contract of up to $10 million or a non-federal contract of up to $6.5 million and meet the requirements of the surety company. 

Pros and Cons of Surety and Fidelity Bonds

The only downside to surety and fidelity bonds is their cost. The cost varies depending on the types of bond and the financial strength of your business, but in general, they range from 1% to 10% of the bond amount. That means a $50,000 bond would cost anywhere from $500 to $5,000. 

The pros of surety and fidelity bonds are that it allows you to secure larger contracts, which can be lucrative for your business. They may be required for your business, so purchasing one means you’re compliant with the law. In many cases, the bonds protect your clients, which gives them peace of mind and makes them more likely to choose you for their business. 

Surety vs Fidelity Bonds Limits

Surety companies set bond limits. The most a surety company will bond a business for is called its bonding capacity. 

There may also be a minimum bond amount required depending on the type of bond you need. For example, a contractor in Cleveland, Ohio, needs a minimum of a $25,000 bond. Colorado manufactured home installers need a $10,000 surety bond. 

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Finding the Right Surety Company

To secure a surety or fidelity bond, contact a reputable company. You’ll need to complete an application and provide information about your business, including your balance sheet, income statement and statement of cash flow. 

If you’re a small or new business, you may want to apply for a bond guaranteed by the SBA. If you have questions along the way, don’t hesitate to ask the surety company. 

Frequently Asked Questions