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What is a Surety Bond?
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A bond is a three-party agreement between the Principal, Obligee, and Surety.
The Principal is the party (i.e., contractor) required to furnish the bond. The
Obligee is the beneficiary, or owner of the project, often a private company,
governmental agency, or municipality. The Surety, most often an Insurance
Company, backs the performance of the Principal. If the Principal is unable to
complete the project satisfactorily per the terms of the agreement, the Surety
assumes responsibility to the Obligee.
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What is the Difference Between a Suretyship and Insurance?
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The main difference is that Suretyship is a three-party agreement, while
insurance is a two-party agreement. Insurance pays to or on behalf of insureds.
With Suretyship, the Surety pays to the Obligee, and retains the right of
recovery from the Principal.
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What are the different types of Surety Bonds?
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Although there are many types of bonds, they fall into three main categories:
Contract, Commercial, and Miscellaneous.
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Contract Bonds guarantee the performance of a contract. They are
mandatory on public work and are often required by private entities and lending
institutions. There are four main types of Contract Bonds:
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Bid Bonds guarantee the bidder's promise to enter into a contract in the
event their bid is accepted.
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Performance Bonds guarantee the principal will perform in accordance
with the terms and conditions of the contract.
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Payment Bonds guarantee that laborers, suppliers, subcontractors or
anyone else required for the performance of the contract will be paid.
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Maintenance Bonds, although not always required, guarantee the work
performed in the contract against workmanship and materials for a period of
time following completion.
Commercial and Miscellaneous Bonds are generally required by some
statute, and guarantee some aspect of the Principal's operation or various
agreements. Some examples would include:
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License and/or Permit Bonds guarantee that the principal will abide by
the terms and conditions set forth for the business he is engaged in.
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Union Welfare Bonds guarantee a contractor will stay current with their
union dues, wage and fringe benefit payments.
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Tax Bonds are required by government entities and guarantee that the
principal will pay their taxes in accordance with the governing law.
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Court Bonds can be required of either party in a lawsuit, and guarantee
the principal will pay any settlement or damages the court awards against them.
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Fidelity Bonds generally protect the employer in case of any loss of
money or property due to employee dishonesty.
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Public Official Bonds guarantee to the people that a public official
will do whatever the law requires of that position.
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Customs Bonds guarantee to the Customs Bureau of the United States
Treasury Department that Importers, Exporters, or Carriers will faithfully
abide by all laws and regulations governing the importation of merchandise into
the United States.
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What is Indemnity?
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In a surety relationship, indemnity means the principal agrees to fully
reimburse the surety for any claims or expenses that were incurred because he
did not live up to his obligation of the bond.
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What would constitute a claim under a surety bond?
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A claim occurs when the principal does not fulfill the obligation designated by
the bond.
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What happens if a surety company has to pay a claim?
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The surety will investigate the claim. If they determine it is valid, the
Principal is reminded of his indemnity and given the opportunity to satisfy the
claim. If he does not respond, the surety will settle the claim and proceed to
collect reimbursement from the principal.
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What is the underwriting process of a bond?
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The underwriting process varies with the type of bond. Some bonds can be
written very easily, others require substantial information. You may contact us
for additional information at info@suretekbonds.com.
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What are the costs involved in obtaining a bond?
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The Surety Association of America sets the guidelines for bond rates. They
generally depend upon the risk involved and the evaluation of the underwriting
information.
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