What are the disadvantages of a surety bond?
A surety bond acts as a three-party guarantee of contract performance, but it presents several structural drawbacks for the principal or contractor purchasing it. A major disadvantage is financial indemnity; unlike traditional insurance where the insurer absorbs losses, a surety bond legally requires the principal to fully indemnify the surety company for any claims paid out, meaning the business owner remains 100% personally and commercially liable for losses. Furthermore, the underwriting and qualification process is notoriously rigorous, requiring spotless credit histories, extensive financial statements, and strict vetting, which can block small or startup businesses from securing necessary project bids.
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