What is a Surety Bond?
DEFINITION: SUR•E•TY BOND
A surety bond provides a guarantee that a specific task – such as a contractor completing a building project or a travel agency using client funds to purchase elements of the itinerary – is completed to the terms of a contract or in line with laws and regulations.
How Do Surety Bonds Work?
There are three parties involved in obtaining a surety bond:
The person or company requiring the bond, which is most often a government agency, regulation department, state/federal court, or general contractor.
The person or company purchasing the bond and promising to adhere to the terms of the bond (a contract or legal regulations).
The insurance company that is backing the bond for the principal and guaranteeing payment to the obligee if a claim is made.
Unlike a traditional insurance policy where the principal pays an ongoing premium for coverage, surety bonds are part insurance and part credit. To put it simply, surety bonds are insurance policies for the obligee that are backed and paid for by the principal.
The surety sits in the middle – offering a guarantee of payment to one party and collecting the payment (if a claim is made) from the other party. When the principal purchases a surety bond, they are buying a line of credit. The surety is simply saying, “They’re good for it.”
Most often, surety bonds are required by a government agency, regulation department, state or federal court, or general contractor.
The surety bond is used as a guarantee that the principal will fulfill the terms of a contract (contract or construction surety bonds) or abide by the laws that regulate their business (commercial surety bonds). If an obligee feels that the terms of a contract were not fulfilled or if a business is found to be in breach of the laws that regulate their business, a claim can be made against the surety bond. If the surety finds that the claim is valid, the surety will pay the claim, and the principal is responsible for reimbursing the surety for the claim and any legal costs.
What Bonds Do I Need?
There are thousands of surety bonds that depend on the needs of the agreement.
If the surety bond is based upon a specific contract, you will need a contract bond, also known as a construction bond. This is a broad category with specific surety bonds available. Click here to learn more about contract surety bonds.
If the surety bond is related to adhering to the laws and regulations that apply to your industry, you will need a commercial bond. This is a broad category with specific surety bonds available. There are two major sub-categories of commercial bonds: license & permit bonds and court bonds. Click here to learn more about commercial bonds.
If the surety bond is required to receive licensing or permitting, you will need a license and permit bond. This is a sub-category of commercial bonds designed to protect the general public by guaranteeing compliance to regulating laws. Click here to learn more about license and permit bonds.
If the surety bond is connected with a legal proceeding, you will need a court bond. This sub-category of commercial bonds is used to minimize losses resulting from a court ruling or to insure compliance with court-mandated actions. Click here to learn more about court bonds.