There are many people who will need to get a surety bond at some point in their life. This is why it is important to understand what surety bonds are and how they work. When you understand surety bonds, you will have a better understanding of why many professions require them.
What Is A Surety Bond?
A surety bond is a legally binding contract that ensures a business will meet certain obligations. The parties involved in the contract will be the principal or the person who needs the bond, the obligee or the person requiring the bond and the surety provider. The surety provider will generally be an insurance company then guarantees the principal will fulfill the obligations set out by the bond.
Many people misunderstand surety bonds because the purpose of the bond will vary depending on the perspective that you use to look at them. A surety bond is partially an insurance policy and partially credit. There are also a number of different types of bonds that you can get which will guarantee different things.
How A Surety Bond Works
A surety bond is a form of insurance for the obligee as they are the party which can claim from the bond should the principal not meet the set terms. The bond will also work as credit for the principal as all funds for the claims will be paid initially by the surety provider and the principal will then have to pay the surety provider back. When a surety bond is taken out, certain terms will be set and the principal will need to abide by these terms.
If the terms of the bond are not met by the principal, the obligee will claim against the bond. The principal will then have to pay back the full claim and additional legal costs to the surety company. Before a surety bond is provided to the principal, the surety provider will generally ask for an indemnity agreement to be signed. This will generally state that the surety company can use business and personal assets to cover the costs of any claims.
Getting A Surety Bond
Before you look at surety providers, you need to know the process of getting a surety bond. The first step will be to determine the type of surety bond that you need. There are thousands of different bond requirements and if you purchase the incorrect one it will be rejected by the obligee. If you run a construction company, you will need to look at contractor bonds or bid bonds depending on what you are going to be doing. If you are completing a construction project that is worth more than $100,000 you need to have a surety bond by law.
If you do not need a bond for a specific project, there are 3 different bond types to consider which gadelaw.com has a lot of good info on. These are licensing bonds, court bonds and fidelity bonds. Licensing and court bonds are required for certain situations, but a fidelity bond is optional.