August 3, 2017 (updated: October 9, 2019)
The cost of a surety bond is a percentage of the bond amount. This percentage can vary widely, ranging anywhere from 0.5% to over 10% of the bond amount (coverage). Because the cost can vary so much, it is important to rely on experienced surety bond experts to ensure you get the right bond from a reputable insurer at the lowest cost available for your specific situation. You may also want to try our Surety Bond Cost Calculator for a quick estimate of your bond cost.
Who Determines the Cost?
To get a better picture of how surety bonds are priced, it is first helpful to understand a bit about the process, the parties involved, and the respective roles and responsibilities in determining your bond price or premium.
The process starts with someone telling you that you or your business needs to post a surety bond. This party is called the obligee. In most cases, the obligee is a local, state, or federal government authority, or a private party. The bond is usually required to guarantee compliance or payments with contractual terms associated with a licensing or permitting activity you are undertaking.
When you first submit an application or request a quote for a surety bond, you are likely speaking with a licensed agent or broker. The responsibility of the agent or broker is to take your application, assist you in the bonding process, answer questions and identify the best surety company to write your bond. Agents and brokers usually partner with several surety companies in order to secure the best prices (lowest costs) for their customers for any specific bond need.
The surety companies (insurers) determine the cost of your bond based on rate filings that have been approved by state insurance departments. Essentially, the surety company has determined different risk categories and assigned corresponding rates (prices) to each. The agents can then offer these prices to customers in the market.
How is the Bond Cost Calculated?
As discussed above, the surety companies use rate categories for each type of bond. The rate categories reflect the expected risk of loss determined for each risk type. Rates typically range from 0.5% to over 10% of the amount. The rate multiplied by the bond amount equals the cost of the bond for each year.
The bond cost is then adjusted up or down as required for partial or multi-year terms. Many carriers will offer a multi-year discount for bonds purchased for 2 or more year terms. For example, one large carrier offers a 25% discount for each subsequent year purchased upfront for many of its bond types.
The key factors that may be used by surety underwriters to determine the rate category for a bond include:
- Your credit score and history (including payment trends and any judgments, liens, charge-offs or bankruptcies). The insurers believe there is a relationship between credit history and likelihood of adhering to bonding terms and conditions. An applicant who has not satisfied financial obligations in the past may be more likely violate a bonding requirement, resulting in a loss for the insurer.
- Your business and/or personal financial statements including balance sheets and income statements. This provides underwriters with a better understanding of financial wherewithal and ability to stand behind (indemnify) the bond obligation in the event of a claim.
- Your experience and business credit history. The insurance company may review various sources to evaluate business credit history
- Licensing history. A review of applicable licensing databases can be used to determine if there has been a history of complaints, compliance violations or claims associated with the applicant’s past endeavors.
- The risk of loss to the surety company associated with the specific bond obligation.
In most cases, only a few of the items above will be used to evaluate and price a request.
Bonds that guarantee tax or other payment commitments typically command a higher rate than those that ensure compliance with license or permit requirements.
Fixed Price & No Credit Check Bonds
There are some cases where bonds are available for set prices regardless of credit. Fidelity bonds such as business service bonds and janitorial service bonds are generally available without a credit check at a pre-set price. The price will vary based on the bond amount and potentially based on other factors such as how many employees are covered by the bond.
It's important to note that even on fixed-price, no-credit bonds other qualifying factors may be considered for eligibility such as bankruptcy history, prior surety bond claim activity, felony convictions, or other bond-specific questions.
Other types of bonds are offered at low fixed prices because they are considered to be "safe" bonds by the insurance companies due to low claim activity against the bonds. Bonds such as notary public bonds, ERISA bonds, and insurance adjuster bonds are available for set prices in most states. Some bonds such as certificate of title bonds and highway permit bonds are usually available without a credit check at 1% or 1.5% of the bond amount.
There are also cases where license bonds such as the Oregon contractor license bond, many local Ohio contractor bonds, and private investigator bonds in most states do not require a credit check and may have a pre-set price.
Is the bond cost different for new businesses or bad credit situations?
Yes, in many cases, the bond cost may be a little higher for these types of applicants. Many insurers will feel comfortable offering a business with several years of successful operation or an owner with many years of experience in an industry a lower bond cost than someone just starting out in a new trade without an established customer base or operation.
In the same way, applicants with poor or limited credit history may find that their bond costs are higher. Fortunately, there are a growing number of insurers that specialize in working with new businesses and those with bad credit to offer them more competitive pricing.
Can my bond cost change after issuance?
In most cases, the cost of your bond is fixed for the entire bond term. However, changes to the bond amount, ownership structure or the term of the bond may result in an increase or decrease in the bond cost. Additionally, many bonds contain cancellation provisions in the event that the insurer or the customer needs to terminate the bond.
A mid-term surety bond cancellation will usually result in a partial return of premium to the customer. It is important to point out that some surety bonds are not cancellable during the term. Others may require an official release from the obligee for cancellation.
Will the cost change at renewal?
The cost of the bond often times will change at renewal. A good agent will "shop" for a better rate on behalf of the customer to see if new insurers have entered the market who may be offering better pricing for the bond type. Most carriers will also reevaluate the application so any changes in credit situation, licensing status or changes in the other factors outlined above may impact the renewal bond cost. Renewal costs may also change based on changes in the overall claim and loss history experienced by the carrier for a bond class.
How to Get My Bond Cost?
Start with our easy online quote request form. The quote request only takes a couple minutes and your quote is free with no no-obligations. If you prefer, give us a call. The helpful and knowledgeable staff at Surety Bonds Direct has years of experience delivering surety bonds at great rates to all types of customers across the country. We handle bonds for new and existing businesses. We handle bonds for customers with poor credit and with excellent credit.
We use a simplified bonding process and leverage our deep surety market expertise to negotiate the best rates with leading surety companies on your behalf. Premium financing options may also be available to spread out the cost of your bond over time.