Car insurance is required in almost every state, and most drivers need the protection of an auto insurance policy, but there are some rare situations where buying car insurance may not be the right choice. For example, someone who needs to insure a whole fleet of vehicles or someone with several moving violations, accidents, or DUIs may find that a standard car insurance policy is too expensive.
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In these instances, drivers may want to consider a surety bond instead of car insurance. While it isn’t allowed everywhere, there are many states that let drivers buy a surety bond, a type of financial guarantee, instead of a car insurance policy.
Key takeaways
A surety bond is a binding agreement between someone who needs to meet an obligation and a company that agrees to guarantee that obligation will be met.
In some instances, a driver can choose to buy a surety bond instead of a car insurance policy, but the laws about this will vary from state-to-state.
Buying a surety bond in place of a car insurance policy is pretty rare; this usually only happens if a company wants to insure a fleet of vehicles or if a driver can’t find a car insurance policy that will cover them.
What is a surety bond?
A surety bond is a legally binding agreement between someone who needs to meet a financial obligation and a company that agrees to guarantee that obligation will be met.
It can act as a replacement for car insurance, because a third party (the surety company) guarantees to pay for any damage you cause in an accident, up to the limits of your bond.
Think of a surety bond company like someone who is cosigning a loan. As the customer, you agree to certain financial obligations. If you fail to meet those obligations, your cosigner (or, in this case, surety company) agrees to cover those obligations for you. Once they’ve paid those costs on your behalf, they require you to pay them back.
Where do you get a surety bond?
Companies that sell surety bonds (including some car insurance companies) are required to be licensed by the state. The U.S. Department of the Treasury has assembled a list of surety bond companies and the states they are licensed to do business in, or you can reach out to your local DMV to find out which companies are licensed to sell bonds in your state.
How does a surety bond work?
There are many different types of surety bonds, but they all basically work the same way. Unlike with a standard car insurance policy, which is a two-party agreement between the driver and the insurance company, there are three parties involved with a surety bond:
The principal: This is the person who needs to fulfill a financial obligation. In this article we are talking about someone who needs to guarantee they will be able to pay for bodily injuries and property damage they might cause in a car accident, but there are many situations where someone might need to guarantee they will meet a financial obligation.
The obligee: This is a fancy way of identifying who is requiring someone else to be bonded. In this case, the state requires you to buy a minimum amount of car insurance, but in some situations (like if you own a fleet of cars) the state will allow you to purchase a surety bond instead of a standard car insurance policy.
The surety: This is the company that issues the bond. Surety companies usually charge somewhere between 2% and 5% of the total bond amount, although this can vary from one state (or company) to the next.
Genius tip
In most instances, the obligee is the one who will get paid by the bond company, but surety bonds that replace a car insurance policy are different. The state is the obligee that requires you to be bonded, but the bond would pay out to an injured party in the event of a claim.
What is the difference between a surety bond and an insurance policy?
The difference between a surety bond and a car insurance policy comes down to who is taking on the financial risk when you are in an at-fault accident.
When you buy car insurance, the insurance company agrees to take responsibility for the costs associated with an accident (up to the limits of your policy) in exchange for your monthly premium payment. Basically, the car insurance company is pooling their customers’ money and making a gamble that they’ll be able to bring in more in monthly premiums than they will pay out for claims.
But if you buy a surety bond, you are agreeing to take responsibility for the cost of an accident yourself and the surety company is your guarantor. If you have a surety bond and you’re in an accident, the surety company pays the cost of damages (up to the amount of your bond) and then works with you to be repaid the amount they spent upholding your financial obligations.
→ Learn more about how car insurance works
Who should consider buying a surety bond?
Most people are much better off buying a standard car insurance policy than purchasing a surety bond, but how do you know if a bond is a better option for you?
Drivers who should consider buying a surety bond instead of car insurance include::
1. People who can’t buy car insurance
If you aren’t able to buy car insurance, whether that is because you have too many tickets on your record, you own a fleet of cars, or your car isn’t able to be insured (for example, kit cars and certain car modifications may leave you uninsurable in some instances) a surety bond might be a good option for you.
2. People who can afford to pay for an at-fault car accident out of pocket
If you have enough money on hand to pay for a major car accident out of pocket (remember, an accident could cost tens of thousands of dollars or more), you may not want to pay for a car insurance policy you might never use. People in this situation might choose to self insure, and a surety bond is one way to do that.
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Which states allow drivers to use a bond instead of car insurance?
Not every state allows drivers to choose a surety bond or other self-insurance option instead of buying a car insurance policy. The chart below shows which states allow drivers to self-insure and what the requirements are:
Frequently asked questions
What is an SR-22 bond?
Sometimes referred to as an SR-22 bond or an economic responsibility bond, an SR-22 is a form that gets filed with the state to prove you have car insurance coverage. An SR-22 is not a surety bond.
Is a bond an insurance policy?
No, a bond is not an insurance policy. It serves the same purpose (paying for damage you cause in an accident) but drivers with a surety bond are assuming the financial risk themselves instead of transferring the risk to an insurance company.
Is surety the same as insurance?
Nope! A car insurance policy transfers the financial risk of a car accident from the driver to the insurance company. This means if you are in an at-fault accident, the car insurance company will pay the claim. But drivers who choose a surety bond are accepting 100% of the risk themselves, which can save money if you aren’t in an accident, but will be much more expensive if you ever need to use your bond.
What are the benefits available to a surety bond?
The biggest benefit to a surety bond is that it allows you to drive without purchasing car insurance, and if you can’t buy (or don’t qualify) for a traditional car insurance policy it is often the best, most cost effective option.
