Surety bonds may seem confusing and intimidating if you don’t have the correct information on them. They are good for business and necessary in many situations, as they implant trust in your company and enhance its reputation while ensuring its compliance with the laws and regulations of your industry. Simply put, surety bonds are legally binding contracts that ensure the completion of obligations or compensate the affected party if certain obligations weren’t met. Governments usually use surety bonds, but they can also be used to cover losses at a court case or protect companies from employee fraudulence. It’s imperative to know what surety bonds are in order to make a better decision while getting one, so read on for more information on the subject.
What is a Surety Bond?
Surety bonds are three-party contracts where a surety company promises that the first party will meet the obligations of the second party. If the first party fails to meet these obligations, the surety company will pay the second party. The three parties in a surety bond are:
- The Principal
The principal is the company or the person who needs the bond to complete a project. Small businesses need surety bonds to compete for a project and give assurance to the customer that they will get the product or service wanted. The principal pays a premium to the surety which usually is an insurance company.
- The Obligee
In most cases, the obligee is a governmental agency or entity. They are the party that will get compensated for the damages or unmet obligations by the principal. The surety bond provides assurance for the obligee to make sure they don’t suffer any losses or damages if the obligations weren’t met.
- The Surety
The third party in surety bonds is the surety that protects the principal and the obligee. Typically, the surety is an insurance company or a subsidiary of it. They protect the principal by covering the initial cost if someone filed a claim on the bond; however, the principal will pay fully for the future damages. The protection the surety offers to the obligee is being responsible for covering any damages or failed requirements of the surety bonds from the principal.
Types of Surety Bonds
There are numerous types of surety bonds, each one has a unique purpose, and some of them are used in certain industries only. However, most of those bonds fall under the following categories:
- Contract Surety Bonds
Governmental agencies usually require this from contractors and subcontractors. These bonds ensure that the contractor (the principal) will complete the project and pay the subcontractors and workers fairly. The principal’s credit score affects the premium on their contract surety bond along with its financial performance, experience, and existing lines of credit. There are several types of contract surety bonds which include:
- Bid bond
- Performance bond
- Payment bond
- Maintenance bond
- Commercial Surety Bonds
Commercial surety bonds contain thousands of types of surety bonds and they are required by a government to protect public interests. Many licensed businesses use these bonds as a guarantee to stay compliant with all regulations and laws concerning the rights of the general public. Lottery-ticket sellers, liquor stores, automobile dealers, and other professionals are the most common type of principals in a commercial surety bond. Commercial surety bonds types include:
- License and permit bonds
- Mortgage broker bonds
- Fidelity Surety Bonds
Employee corruption and theft pose a great threat to companies and that’s why they use fidelity surety bonds to protect their assets. These bonds are essential for companies that deal with large amounts of money, sensitive information or data, and expensive items. You protect your business with these bonds and any clients you have that may be affected by the harmful acts. The three types of fidelity surety bonds are:
- Business services bond
- Employee dishonesty bond
- ERISA bond
- Court Surety Bond
Defendants and plaintiffs are the most common principals of the court surety bond to protect them from losses in court cases. The types of court surety bonds are:
- Cost bond
- Administrator bond
- Guardianship bond
- Attachment bond
This article should give you the basic information you need to make an informed decision before getting a surety bond. To acquire a surety bond, contact bond brokers, agents, or insurance companies, and apply for one. The bond agency will get back to you after assessing the project to tell you of the requirements needed to get the bond completed. Bonds are made to ensure the completion of contractual agreements for business operations and in the process, they help improve your business reputation and credibility.