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Surety Bond 101: Everything You Should Know Before Getting a Surety Bond

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Those who are starting a business, want to sell a car, or own a construction company probably already know the meaning of the term surety bond. But if this is the first time you’ve come across it, you are probably wondering what it is, who can acquire it, and how much does a surety bond cost? So, here is a quick overview of all you need to know about surety bonds.

What Are Surety Bonds?

In simple words, a surety bond is a legally binding agreement among three parties: the obligee, the principal, and the surety. This agreement i a financial guarantee by the first party (“surety”) to another party (“obligee”) that the third party (“principal”) will meet all the contractual requirements.  In general, such an agreement protects the obligee against losses if the principal fails to perform their obligation while the bond is active.

Let’s discuss participants of a surety bond in more detail.

Principal

The principal is the party that obtains the surety bond. This is usually the business owner that is contracted to do a project. Overall, the principal is responsible for adhering to all of the contractual terms of the business agreement.

Obligee

The party that requires the surety bond is the obligee. If you have a construction project, the project owner is the obligee. In the case of commercial surety bonds, the most common obligee is a state agency.

Surety

The surety is a party that issues the bond and guarantees financial coverage.

4 Types of Surety Bonds

You can get surety bonds for numerous reasons. Therefore, there are hundreds of different types of surety bonds, and it’s a bit complicated to classify them. Below, we will talk about the three primary types — contract, commercial, and court surety bonds – as well as fidelity bonds.

  1. Contract Surety Bonds

We mainly use this type of surety bond in the construction industry to protect the owner from financial damage. If the contractor cannot meet the contract terms for any reason, the obligee can still receive their compensation. Here are a few of the most common contract surety bonds you will encounter.

Bid Bonds

Governments occasionally require this form of arrangement to ensure that bids are made in good faith. When the obligee chooses to accept the contractor’s proposal, the bid bond becomes legitimate. If the contractor abandons the project, they must pay the obligee compensation equal to the difference between the contractor’s initial offer and the next lowest bid.

Performance Bonds

Such contracts guarantee that the obligee will be compensated if somehow the principal fails to complete the project in due time or to the required standards. In addition, the surety company will ensure that the job is completed.

Payment Bonds

Also known as labor and materials bonds, payment bonds guarantee that contractors will pay everyone included in a project. Such documents provide financial security to subcontractors, laborers, and equipment suppliers.

2. Commercial Surety Bonds

Commercial surety bonds protect entities across different markets and make sure professionals do not commit fraud or other kinds of harmful business practices. Below, you can find some of the most common types of surety bonds.

License and Permit Bonds

Required by the government to be certain that a business will respect the specific license or permit conditions in their area.

Lost Document Bonds

This kind of surety bond helps cover any cost in case someone loses a sensitive document.

Administration and Property

When it comes to trust and estate issues, people opt for this type of bond.

Customs and Excise Bonds

Customs and excise bonds cover everything related to importing and exporting goods.

3. Court Surety Bonds

In case an individual intends to file a lawsuit, they will need this type of bond to protect themselves from financial loss. Moreover, we can use these bonds to assist in the completion of court-ordered assignments. Two of the most important court surety bonds are: judicial and fiduciary or probate bonds.

Judicial Bonds

We usually use these bonds to reduce future losses that may result from a court decision. Appeal bonds, bail bonds, and plaintiff’s-attachment bonds are all examples of judicial bonds.

Fiduciary/Probate Bonds

This bond guarantees that someone handling the obligee’s finances is doing so in an ethical and responsible manner. Custodian bonds, executor bonds, and guardianship bonds are a few of the subtypes.

4. Fidelity Bonds

The purpose of fidelity bonds is to safeguard the company owner or the recruitment party from employee misconduct. Employees bound by such agreements are less likely to cause damage, steal, or participate in other unethical behavior. The difference between fidelity and surety bonds is that they are usually long-term. Also, if the worker is a union member, the union will most likely have to take on any expenses incurred as a result of the damage or mishandling, as the bond stipulates.

Conclusion

Obtaining a surety bond is critical because it provides all parties with legal protection in the event that something goes awry. So, whether you’re buying a car, setting up a business, or going through a legal process, you should look into getting a surety bond.

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