what is a surety bond and do I need one in addition to general liability insurance

The Virginia Bureau of Insurance gives a construction example. A client may require a builder to buy a bond under a construction contract. If the builder fails to perform as agreed, the client can get a settlement. The bonding company then seeks reimbursement from the builder, who is the principal under the bond.

The same Virginia guide says governmental agencies may require businesses to obtain license and permit bonds, which guarantee compliance with laws and ordinances and good-faith performance.

The SBA's surety bond page separates two groups. Contract bonds ensure the terms of a specific contract are fulfilled. Commercial bonds ensure applicable laws and regulations are followed. The SBA says it guarantees contract bonds but not commercial bonds.

The Texas Department of Insurance says premises/operations coverage in a CGL policy pays for bodily injury or property damage that occurs on your premises or as a result of your business operations. Products/completed operations coverage pays for bodily injury and property damage that occurs away from your premises and is caused by your products or completed work.

TDI adds that coverage varies by insurer and that CGL policies generally exclude property damage to your work, with an exception when a subcontractor working for you caused the damage. TDI advises reviewing your policy and any endorsements. For a contractor-focused look at finished work, see Does general liability cover damage after a contractor finishes work? and the general liability overview.

The sources point to a few places a bond request can originate. They do not say these are the only ones.

• A client contract. In the Virginia Bureau of Insurance's example, a client requires a builder to buy a bond. The SBA says many public and private contracts require surety bonds.
• A license or permit. The Virginia guide says governmental agencies may require license and permit bonds. The issuing agency can say which, if any, it asks for.
• An SBA-guaranteed contract bond. The SBA guarantees bid, performance and payment bonds issued by certain surety companies, which lets those companies offer bonds to small businesses that might not meet other sureties' criteria. The SBA's page also lists an ancillary category among the bond types it guarantees, covering requirements outside performance or payment, such as maintenance.

For SBA-guaranteed bonds, the SBA lists these eligibility points: the business qualifies as small under SBA size standards, the contract is up to $9 million (non-federal) or $14 million (federal), and the business meets the surety company's credit, capacity and character requirements. The SBA says performance and payment bond guarantees carry a fee of 0.6% of the contract price, and it charges no fee for bid bond guarantees.

State guides cover Virginia and Texas, and the contractor insurance checklist lays out buying steps for contractors.

This worksheet organizes what to ask before you apply for a bond or sign a contract.

Confirm with your insurer or bond issuer:

1. Which policy forms, exclusions and endorsements apply to your CGL policy.
2. Whether the bond you are asked for is a contract bond or a commercial bond.
3. What reimbursement obligation you would have to the surety if a claim is paid on the bond.
4. Whether any fees, such as the SBA guarantee fee for performance and payment bonds, apply.
5. Whether the policy or bond term matches the contract or license period.

The Business Insurance Assessment turns your answers about your business into an editable checklist with a printable report, which can help you organize these questions.

Have a question about your own situation? Send it to PolicyBenchmark.