Whether you’re a contractor bidding on construction projects, a supplier providing goods or services, or a professional seeking to fulfill licensing requirements, understanding surety bonds is crucial. This guide demystifies the concepts behind these bonds and explores how they work within the business landscape.
What is a Surety Bond?
A surety bond guarantees that mutual agreements, contracts, and other business deals will be completed as agreed upon. It protects consumers and government entities from malpractice, theft, and fraud by the principal. If a principal breaks the bond’s terms, the harmed party can claim the bond to recover losses.
A surety bond has three parties: the principal, the obligee, and the surety company. The principal purchases the bond and promises to fulfill the obligation stipulated in the contract or agreement. The obligee is the person requiring the bond, usually a government entity.
To secure a bond, the principal must pledge their company and personal assets to the surety company, unlike insurance, which involves a two-party contract between the insured and the insurer. A surety bond is often less expensive than a commercial insurance policy. This is due to the lower level of risk. The premium for a surety bond can range from as low as 1% to 5% of the bond amount.
How Do I Get a Surety Bond?
What is a surety bond? Surety bonds are written agreements that form a three-party agreement between the bond policyholder (the principal), the insurance company that provides the bond (“surety”), and the entity that requires the bond “obligee.” The bond assures the obligee that the bonded person or business will fulfill an obligation under an underlying contract or following local laws. If there is a claim, the surety will pay the obligee and then take legal action against the bonded individual or business to get back the costs paid for the obligee.
The process of getting a surety bond is relatively straightforward. The bond cost, also called the premium, may differ based on the bond type and the desired coverage amount. The best way to determine the bond cost is to submit an application and be evaluated. Some industries and professions must get a surety bond for their licensing or permitting process.
What are the Different Types of Surety Bonds?
There are several different types of surety bonds, each designed for a specific purpose. For example, a business service bond, also known as a fidelity surety bond, protects a client or customer of a company from dishonest acts by the company’s employees. On the other hand, a construction surety bond guarantees that a contractor will complete work as specified in a contract or incorporated document.
Most surety bonds involve the obligee, the principal, and the surety company. Generally, the obligee will require that the principal be bonded before being allowed to perform certain services. The principal must then pay a premium or fee to obtain the bond, typically based on the principal’s creditworthiness and industry experience. In addition to these common types of surety bonds, miscellaneous surety bonds can be used for various purposes, including establishing lost promissory notes and securities, guaranteeing a lease, and more.
How Do Surety Bonds Work?
Surety bonds function as insurance that guarantees certain obligations will be met. This could be that a contract will be fulfilled or that court requirements will be followed. It also protects consumers and businesses from losses the bond’s principal incurred.
To obtain a surety bond, you must meet specific criteria set out by the obligee requesting the bond. For example, a government agency that needs a guarantee that a road project will be completed in the specified time frame is likely to request a construction bond. These are called contract surety bonds.
Other types of surety bonds include license and permit bonds. State or local governments typically require these to satisfy occupational licensing requirements for businesses such as auto dealers, mortgage brokers, freight brokers, and telemarketing agencies. Fidelity bonds, which are less expensive than contract surety bonds, can be purchased by businesses to protect them and their customers from employee theft and fraud. Read more exciting articles on Tech new master
