What is a Surety Bond, and When Do You Need One?

A surety bond is a legal document that highlights the rights and responsibilities of both the sender and receiver and can provide several benefits to both parties. It can help safeguard both parties from potential risks and ensure they are held accountable for their actions. This article discusses the surety bond and its types.

Fremont, CA: A surety bond is a legally enforceable agreement that guarantees performance or, in the event of default, provides compensation to cover performance gaps. Surety bonds can safeguard a business from dishonest employees, ensure the completion of government contracts, or pay for losses resulting from legal proceedings.

Surety Bond

Surety bonds are an assurance from a surety firm to compensate a first party if the second party defaults on its duties. There are three individuals involved:

- The principle is the one that must be fulfilled.

- The obligee is the individual who needs assurances regarding the principal's performance.

- The surety is the party that issues the bond and assures the principal that it will fulfill its obligations.

The Functioning Of a Surety Bond

A simple definition of a surety bond is that if a principal defaults on a contractual duty, the surety must reimburse the obligee with a certain sum. Surety bonds can be used by commercial and professional parties and often by government bodies as obligatees. Surety bonds give clients peace of mind that they will receive the promised good or service, which helps principals—typically small contractors—compete for contracts.

The principal pays a premium to the surety, usually an insurance company, to help a surety bond. To receive the bond, the principal must sign an indemnification agreement pledging personal and business assets to be reimbursed to the surety in the event of a claim. If these assets are insufficient or uncollectible, the surety pays its own money to settle the claim.

Types of surety bonds

A surety bond includes various surety bond types employed in multiple contexts. They're as follows:

Contract Surety Bond:

A contract surety bond is usually intended to ensure that a contractor—in this example, the principal—performs as promised under a building contract. The surety business is responsible for finding a replacement contractor to finish the job or compensating the project owner for any lost money. The SBA guarantees certain kinds of contract surety bonds.

A contract bond normally costs between 0.5% and 3% of the total contract price, depending on the contract amount. Surety underwriters also consider the contractor's character, cash flow, credit score, and employment history during the underwriting process.

Commercial Surety Bond:

Governmental organizations need a commercial surety bond to safeguard the public interest. Generally speaking, licensed firms utilize these bonds to ensure they abide by all laws and standards about public safety. Typical principals include licensed contractors, car dealers, lottery ticket salesmen, liquor stores, notaries, and certified professionals.

Fidelity Surety Bond:

Businesses purchase fidelity surety bonds as insurance against employee fraud and dishonesty. They are crucial for companies that handle costly goods or substantial sums of money. For instance, credit unions can get a fidelity bond that covers them if a worker forges a fake loan to steal a 10,000-roll business. Businesses, as well as directors, trustees, partners, and current, past, and temporary personnel, are covered by fidelity surety bonds.

Court Surety Bond:

Surety bonds for court proceedings shield individuals or businesses from financial losses. Usually, estate administrators, as well as plaintiffs and defendants, employ these.