What's the Difference? Commercial vs. Contract Bonds
Understanding Surety Bonds: Commercial & Contract Bonds Explained
What is a Surety Bond?
Surety bonds consist of a three-party agreement in which one party (the surety) guarantees to another party (the obligee) that a third party (the principal) will fulfill their obligations as outlined in the bond, statute, contract or other obligation. Unlike traditional insurance, the principal is obligated to pay back the surety company on any claims paid out. The two main types of surety bonds are commercial bonds and contract bonds.
Key Differences: Commercial vs. Contract Bonds
While both commercial and contract bonds serve to guarantee performance or compliance, they are utilized in different industries for distinct purposes.
- Commercial Bonds: These bonds ensure that a business or individual complies with all applicable laws and regulations, protecting the public from fraud and ensuring business practices align with legal standards.
- Contract Bonds: Typically used in the construction industry, contract bonds guarantee that contractual obligations will be met, guaranteeing that the contracted work is completed as agreed upon.
Surety Bond Underwriting
Underwriting requirements differ based on the bond type and situation:
- Commercial Bonds: In many cases, underwriting can be streamlined, allowing for instant issuance online without the need for documentation. However, more complex commercial bonds may require additional information, such as financial statements, credit checks, and signed indemnity agreements.
- Contract Bonds: These typically require a more in-depth review, including financial statements and an analysis of the principal’s financial strength. Merchants’ Rapid Access Program (RAP) offers a simplified underwriting process for smaller bonds or trusted contractors, requiring less documentation.
Common Surety Bond Types
Commercial Bonds:
Contract Bonds:
Cost of Surety Bonds
The cost or premium required for a surety bond varies based on several factors, including bond type, term length, and the level of risk involved. Contact a Merchants underwriter to learn more about the bond that suits your needs.
Why Choose Merchants Bonding Company?
Whether it's a commercial or contract bond, choosing Merchants Bonding Company ensures you receive the Merchants Difference:
- First Class Service: As a surety-only business, we’ve honed our expertise in surety bonding. Expect same-day turnaround on new submissions and bond requests with Merchants. Each account has a dedicated, knowledgeable underwriting team eager to handle your requests.
- Common Sense Underwriting: Merchants does not underwrite using inflexible formulas. Our willingness to look at each account on its own merits is what Merchants was founded on and allows us to continue to obtain new business.
- Industry-Leading Technology: The Merchants Bonding Company Hub™ consistently receives five-star reviews from customers. It was developed in-house based on requests and feedback from our agents. Features like bond form search by keyword, bond form preview, secure document upload, principal data autofill and online credit card payment make issuing commercial bonds easy and efficient.
- Direct Bill Service: Let us handle the billing. No more chasing bills for increased bond amounts or spending time requesting renewal evidence from your client. Use direct bill on a bond-by-bond basis with the option for direct bill on first year or renewal. Principals can pay online with a credit card.
- Capacity & Trust: Merchants is a top national surety with a wide appetite for commercial bonds from single bond opportunities to multimillion-dollar accounts. A.M Best has rated Merchants “A” (Excellent) or better since 1958.
- Marketing Support: From gift card incentives to swag you’ll love, our marketing department works hard to set your Merchants surety experience apart. Agencies who demonstrate commitment and momentum with Merchants may be invited to our Pacesetters program, which features benefits like magazines, surety events, and opportunities to shop at Merchants Market.
How do I get a Surety Bond?
Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.
What is a Surety Bond?
A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.
All information provided is subject to change.