Common Types of Surety Bonds & How They WorkArticle originally posted on www.insuranceneighbor.com(opens in new tab)
A surety bond is a contract that ensures specific obligations are met. These bonds are often required for contractors working on government contracts. They are performance-based. A surety bond is a guarantee between three parties. The parties in a surety bond are:
- The Principal: The individual who is required to have a surety bond.
- The Obligee: The individual requesting the bond.
- The Surety Company: The company guarantees payment to the Obligee in a claim.
Should the Principal fail to meet their obligations when performing contracted work, the correct type of surety bond pays the Obligee, and the Principal must then reimburse the Surety company.
Types of Surety Bonds
Surety bonds come in several types, each providing protection for the Obligee. These include:
- Contract bonds: These bonds are put in place and are often required for large construction projects. These are the most common type of surety bonds and are put in place to protect the Obligee when the Principal fails to meet their contractual obligations. The bonded party is financially liable.
- Commercial bonds: A commercial bond may require some commercial legal entities to obtain a license. These bonds are geared to ensure that professionals act legally and ethically when practicing their profession. A party that violates these standards is held liable.
- Court bonds: A court bond may be required in some legal proceedings. These bonds are most often required in civil proceedings.
- Fidelity bonds: These surety bonds protect businesses and their clients if an employee acts unlawfully. Many business owners add this added layer of protection to their business insurance portfolio. A fidelity bond can be of great benefit to business owners who face legal repercussions due to the actions of an employee.
Contract Surety Bonds
These surety bonds are put in place to guarantee a contractor (the Principal) performs the work as contracted. How the bond is written will vary based on the type of contract. Contract surety bonds vary in cost and reflect the contractor’s financial condition, credit score, work history, and other factors. These bonds come in four basic types:
- Bid bonds: These bonds are put in place to guarantee that a contractor can deliver the work as submitted in a bid.
- Performance bonds: These surety bonds protect the Obligee if a contractor does not complete a project as written by the contractor.
- Payment bonds: These bonds protect an Obligee should a contractor fail to pay subcontractors on a project and are typically a requirement for contractors on federal and commercial projects.
- Maintenance bonds: These surety bonds are often referred to as “warranty bonds.” They are put in place to protect the project owners from losses associated with faulty materials or poor workmanship on a project.
Commercial Surety Bonds
These bonds may be required for licensed businesses performing government work. These bonds are usually a requirement for specific businesses, including those that sell alcohol, car dealers, license contractors, notaries, and other licensed professionals in various industries. Several types of commercial surety bonds exist, including:
- License and permit: If you are applying for a professional license, you may be required to purchase and submit a license or permit bond.
- Mortgage broker: Mortgage broker bonds are put in place to protect borrowers should a mortgage broker fail to operate ethically as required by the state.
- Others: Other types of surety bonds may be required by liquor companies, utility providers, warehousing firms, auto dealers, and many other business activities.
Need a Surety Bond?
If you are required to put a surety bond in place, contact our local agent to help you find the correct type of bond for your purpose at a reasonable rate.Filed Under: Business Insurance | Tagged With: Business Insurance, Commercial Insurance, Surety Bonds