Surety Bonds for Minnesota Businesses
Surety bonds are a common requirement for contractors, licensed professionals, and businesses that work on public or private projects. A bond is not insurance — it is a three-party agreement that provides a financial guarantee. Understanding what type of bond you need and how it works is important before you purchase one.
What Surety Bonds Are and How They Work
A surety bond involves three parties: the principal (the business that obtains the bond), the obligee (the party requiring the bond — often a government agency, client, or project owner), and the surety (the insurance company that issues the bond and guarantees the principal's obligations).
If the principal fails to fulfill the obligation covered by the bond — such as completing a contract, paying subcontractors, or complying with licensing requirements — the obligee may make a claim against the bond. The surety may pay the claim, but unlike insurance, the surety then has the right to seek reimbursement from the principal.
Bonds are not a substitute for insurance. A bonded contractor still needs general liability, workers' compensation, and commercial auto insurance. Bonds and insurance serve different purposes and are typically both required for licensed contractors and public project work.
Who Typically Needs a Surety Bond
Contractors in Minnesota are commonly required to be bonded as a condition of licensure with the Minnesota Department of Labor and Industry. Businesses that work on public projects — federal, state, or local government contracts — are typically required to provide performance and payment bonds. Other businesses that may need bonds include auto dealers, mortgage brokers, notaries, and businesses that handle client funds or property.
Types of Bonds Commonly Needed
License and permit bonds
Required by state or local government as a condition of obtaining or maintaining a business license or permit. Contractor license bonds in Minnesota are a common example. The bond guarantees that the licensee will comply with applicable laws and regulations.
Performance bonds
Required on construction and other contracts to guarantee that the contractor will complete the project according to the contract terms. If the contractor defaults, the surety may step in to complete the project or compensate the project owner.
Payment bonds
Required on many public and private construction projects to guarantee that the contractor will pay subcontractors, suppliers, and laborers. Payment bonds protect those in the project's supply chain from non-payment.
Bid bonds
Required when submitting a bid on a construction project. A bid bond guarantees that if the contractor is awarded the project, they will enter into the contract and provide the required performance and payment bonds.
Fidelity bonds
Protect against employee dishonesty — theft of money, securities, or property by employees. Fidelity bonds are sometimes required by clients or contracts, particularly for businesses that handle client funds or property.
Important Distinctions and Limitations to Understand
- A surety bond is not insurance for the principal. If a claim is paid by the surety, the surety has the right to seek full reimbursement from the principal. The bond protects the obligee, not the principal.
- Bond underwriting considers the principal's financial strength, credit history, and experience. Businesses with poor credit or financial difficulties may have difficulty obtaining bonds or may pay higher premiums.
- A bond does not replace general liability insurance. A bonded contractor who causes property damage or bodily injury needs general liability insurance to address those claims — the bond does not cover them.
- Bond requirements vary by project, contract, and licensing authority. The required bond amount, form, and terms are specified by the obligee. Confirm the specific requirements before purchasing a bond.
- Fidelity bonds and surety bonds are different products. A fidelity bond protects the business from employee dishonesty; a surety bond protects a third party from the business's failure to perform an obligation.
Information Typically Needed to Obtain a Bond
- Type of bond required and the obligee (who is requiring the bond)
- Required bond amount and any specific form or language required by the obligee
- Business financial information — for larger bonds, financial statements may be required
- Personal credit information for the business owner — most small contractor bonds are underwritten based on personal credit
- Business history and experience in the relevant trade or industry
- Prior bond claims history, if any
Related Coverages to Consider
General Liability
Contractors typically need both a bond and general liability insurance — they serve different purposes.
Learn moreWorkers' Compensation
Required by Minnesota law for most employers — separate from bonding requirements.
Learn moreCommercial Auto
Contractors with vehicles need commercial auto in addition to their bond and general liability.
Learn moreCommercial Property
Tools, equipment, and materials at job sites need property coverage — not addressed by a bond.
Learn moreIndustries We Commonly Help
Frequently Asked Questions
Bond availability, terms, and requirements vary by bond type, obligee, and individual applicant. The information on this page is general in nature, does not constitute legal advice, and does not describe the specific requirements of any licensing authority or contract. Confirm bond requirements with the relevant obligee before purchasing.