What is a Surety Bond?
What is a surety bond?
In its most basic form, a surety bond is a guarantee. It is NOT an insurance policy. It’s a written agreement between parties.
A Surety bond is made up of 3 parties:
- The Principal – This is the party that needs to get the bond. Aka, they need to get a bond to say that they are good for their service. They need to get bonded.
- The Obligee – This is the party that is requiring the principal to get the bond and be bonded.
- The Surety – This is the bonding company or carrier. They provide the financial backing for the bond.
Basically, the Principal is making a promise to the Obligee that they will follow the term of the agreement. To make this promise, the principal takes out bond with the Surety. The surety is there to provide the financial backing to the bond. But, a surety bond is NOT an insurance policy. If the Principal fails to meet the requirements of the bond, then the Principal is responsible for all the fees and costs associated.
So what does the Surety party do?
Imagine the surety bond like a form of credit – saying that the Principal will follow the agreement between the Principal and the Obligee. If the Surety must pay out on the bond because of a failure of the Principal to respect the agreement, then the Principal must pay the Surety back for all the costs.
The Surety will charge the Principal a premium to take out the bond. Depending on how good or bad the Principal’s credit is, premium will differ respectively. Those with higher credit will often pay less for a surety bond because they are seen as lower risk.
Why do I need them?
Often times, various professions will be required to have surety bonds to operate. For example, in Florida, the DMV requires all car dealerships to get surety bonds. Depending on what field you are in, you might need to get a surety bond.
What are the different types of surety bonds?
There is a wide range of surety bonds, but these are some of the most common ones:
- Performance – This guarantees the performance of work after a contractual agreement
- Indemnity – If a party fails to meet a deadline, then losses are guaranteed
- Bid – After winning a bid, the beginning of work is guaranteed
- License – a bond guaranteed to a state or deferral agency
- Payment – payment is promised to all sub-contractors and vendors
- Fidelity – help offer coverage for losses that may come as a result of a variety of situations that can derail a business
How do I know if I need a Surety Bond for my business?
Whether you need a surety bond largely depends on where you live, what your business does, and whomever you are working with. One common situation where surety bonds are needed is for large-scale projects. Depending on your industry, this could possibly be a common occurrence. If there is some issue with completing the project, having the appropriate bonds in place could add some security.
The best way to figure out if you need a bond for your business is to call up your insurance agent. While a bond is not actually an insurance policy, many insurance companies will offer surety bonds for commercial businesses. Your agent can help you assess your needs and what will work best for you. It’s always better to discuss with you agent if you are ever unsure about anything.
A quick recap:
Surety bonds may be a bit confusing at first glance, but here is the breakdown:
- Surety bonds are a guarantee between 3 parties
- The 3 parties in a surety bond are:
- The Principal – they need to get a bond
- The Obligee – they are requiring the principal to get the bond
- The Surety – They back the bond
- A surety bond is not insurance. It’s more like a line of credit.
- You may be able get a surety bond through an insurance company, like Encharter!
- There are lots of different types of bonds, depending on your business
- Call your agent to talk about surety bonds since they can help you determine what you need.
And those are the basics of surety bonds. Of course, this article just scratches the surface of the surety bond world.
You can call an Encharter agent at 888.754.8299! They can address any questions or concerns you may have and are always happy to help out!
Additional Sources:
YouTube Video by JW Surety Bonds
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