Surety Bonds
Surety Bonds are often required by government agencies or courts, or to serve as a form of protection for consumers. Unlike traditional insurance agreements which involve two entities, surety bonds are an agreement formed by three parties.
Parties involved in Surety Bonds:
Obligee - The person requiring and protected by the bond.
Principal - Company purchasing the bond and promising to adhere to the terms of the bond.
Surety - Issues and backs the bond to the Principal. Guarantees to the Obligee that the Principal can perform the task.
The obligee requires the principal to buy the bond and honor its’ terms. The surety company financially backs the bond if the principal violates those terms. If the surety company pays out any claims made on the bond, the principal must reimburse the surety.
Why Does Your Business Need A Surety Bond?
A Surety Bond protects the Obligee’s contract by offering a line of credit to grant the payment of any claim, guaranteeing the fulfillment of the Principal’s obligations. If the Principal falls short of the contractual obligations the Obligee has the right to file a claim against the Surety to recover damages or losses incurred. If the claim is deemed valid, the Surety company is responsible to pay for the reparations (which, however, cannot exceed the bond amount)
In essence the Surety is the middle man between the two parties, offering the guarantee to the Obligee and collecting the payment if the claim is made from the other party. When the Principal purchases a surety they are purchasing a line of credit.
How Much Does A Surety Bond Cost?
Surety bond premiums vary by jurisdiction since different government agencies have set their own regulations for certain bond types. The needed bond amount directly affects premiums charged by surety providers because they calculate base fees as a percentage of this amount.
Types of Surety Bonds:
Contract Surety Bonds: Guarantee a specific contract
Performance Bond - Principal will complete contract according to its terms, including price and time.
Bid Bond - Principal will honor its bid and sign contract documents if awarded contract.
Payment Bond - Principal will pay all subtractors and suppliers.
Commercial Bonds: Guarantee per the terms of the bond form
License or Permit Bonds - Required for cities or states that the client will be working in.
Court Bond - generic term for many types of surety bonds required by the Judicial system.
Fidelity Bond - protects policyholders for losses caused as a result of fraudulent acts committed by specified individuals.
Sales Tax Bond - Guarantees tax payments to the government are paid.