Surety Bonds vs. Insurance

The distinction between insurance and surety bonds isn’t always clear, so we’ve created a visual showing the differences and similarities between the two.

Insurance-vs-Bonds_Venn-Diagram_01

The surety and insurance industries use the same concepts when placing business, but use different terms to describe each concept. Here are some of the most common surety terms translated for the insurance industry.

Surety Term Insurance Term
Principal Insured
Surety Insurer
Rider Endorsement
Execution Binder
Bond Certificate of Insurance
Penalty Coverage Amount

Pennsylvania Bill Introduced Requires Bond as Option for Security Deposits

Pennsylvania House Bill 2427, introduced on April 21st, 2020, would require property management companies to offer alternatives to a security deposit, including an installment plan or a deposit alternative in the form of a surety bond. If passed, renters would be able to post a surety bond in lieu of the full amount of the security deposit. Surety bonds can be purchased by paying a non-refundable premium that is a small percentage of the full security deposit amount.

Many states already have security deposit surety bonds in place; Florida, Illinois, Michigan, and North Carolina. Security deposit bonds are also options that private landlords and property managers have the option to utilize. Often times, these are 1% of the security deposit amount. A security deposit surety bond is a guarantee from a surety company that any unpaid rent and or damages to a rental property will be covered, up to a certain amount. Surety bonds do not release a renter from responsibility for unpaid rent or damage to the property. If a bond claim were to occur, the surety company pays the landlord or property owner, but will then pursue the tenant for the payout amount.

Allowing for a security deposit surety bond to be purchased in lieu of paying the traditional full amount of the deposit benefits both the tenant and landlord. Tenants benefit by paying a premium that is a fraction of the full security deposit amount. One of the most common reasons tenants sue landlords is in regards to security deposit disputes. A surety bond would free the tenants of having to pay litigation and attorney costs, as this would be the responsibility of the surety company. Landlords would benefit by freeing themselves of the liability and accounting responsibilities of holding deposit funds. Many states require special escrow accounts to be set up to hold tenant security deposits, and that unreasonably high interest be paid to the tenant on the deposit. Overhead accounting costs for tracking deposit funds would no longer be necessary.

The Three Types of Surety Bonds

There are three main types of surety bonds; commercial, contract, and court bonds. Within each of the three types, there are numerous subcategories. The following will provide a general overview of the three main types. All surety bonds are three-party agreements between a principal, obligee, and surety company. However, the purpose as to why these bonds are required varies between bond types.

Commercial Bonds

Local, state, and federal government agencies require commercial bonds for businesses in certain industries. Commercial bonds are required to be purchased before the business can legally be licensed. These bonds are also referred to as “license and permit bonds”. The bonds require that business owners abide by laws and regulations enforced to ensure consumers are not harmed by the business owner’s unlawful acts. These bonds also ensure that the bills and fees will be paid on time, such as utility bills, taxes, employee wages, etc.

Examples of commercial bonds are motor vehicle dealership bonds, freight broker bonds (BMC 84), DMEPOS (Durable Medical Equipment, Prosthetics, Orthotics, and Supplies), notary bonds, contractor license bonds, and marijuana bonds

Court Bonds

There are two subcategories of court bonds- judicial/civil and probate/fiduciary. Judicial/Civil court bonds are required when a court proceeding informs certain parties they must get a specific bond in order to verify their financial and personal integrity. A judicial court bond denies all uncertainties within court proceedings which would lead to losses resulted from a ruling. Fiduciary or probate bonds are required for an individual that is appointed to care for someone else that is either a minor or incompetent to care for themselves. These individuals are appointed by the court to handle assets and the care of a person who cannot do so themselves.

Examples of judicial court bonds are appeal bonds and the plaintiff’s attachment bonds. Examples of fiduciary or probate bonds include guardianship bonds, custodian bonds, executor bonds, and VA bonds.

Contract Bonds

Contract bonds guarantee that only qualified contractors or sub-contractors are able to bid and perform work on construction projects. The Obligee is typically a construction project owner that can be a government entity for public projects or a private property owner.

Examples of contract bonds are bid bonds, payment bonds, performance bonds, and supply bonds.

Pennsylvania State Board of Auctioneer Examiners Surety Bond Requirements

The Pennsylvania State Board of Auctioneer Examiners requires surety bonds in order for businesses or individuals in the auctioneering sector to obtain a license. Below is a list of the surety bonds relating to the Pennsylvania auctioneering industry and some basic facts about each. Two helpful resources for finding businesses or individuals in the industry who need bonds are the Pennsylvania Licensing System Verification and the Pennsylvania Auctioneers Association Auctioneer websites.

  • Trading Assistant
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Trading Assistant License
    • Cancellation Period: 60 Days
  • Special License Applicant
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Special Auctioneer License
    • Cancellation Period: 60 Days
  • Auctioneer
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Auctioneer License
    • Cancellation Period: 60 Days
  • Auction House
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Auctioneer House License
    • Cancellation Period: 60 Days
  • Auction Company
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Auction Company License
  • Apprentice
    • Bond Amount: $5,000
    • Bond Premium: $175 to $435
    • Required for: obtaining an active Auctioneer Apprentice License
    • Cancellation Period: 60 Days