A surety bond is a type of three-party contract that guarantees an obligation such as performance, payment, or lawful conduct. In the case of auto industry surety bonds, the bond financially protects the business’s customers and creditors, as well as the state government, from illegal or unethical conduct by an automobile business. For an in-depth guide to the basics of surety bonds, see What Is a Surety Bond?
Typically, the state government is the party that requires an auto business to purchase a surety bond. Once the business has purchased the bond, they must submit the bond paperwork along with their application for state licensure. Then, should a customer or the government believe that the business has broken the law or acted unethically, they can submit a claim to the surety for financial compensation.