In life, we all want some type of security and surety that what we invest in will pay off. Businesses want the same guarantee.
When companies hire workers to perform certain tasks, they must assume responsibility for their actions or lack of.
There are many types of surety bonds. However, the type of surety bonds depends on the line of business.
For example, there are mortgage broker bonds, collection agency bonds, auto dealership bonds, home lender bonds, etc. The written bonds speak volumes as they cover many if not all aspects of an accepted contract that falls under the guidelines and provisions of the contract.
Anyone with a business should have a surety bond as it provides protection against many mishaps.
What Are Surety Bonds?
Surety bonds are contracts between two or more parties.
Typically, they are considered third-party bonds since three parties are involved: the surety company, the contractor, and the customer.
The contracts or bonds guarantee that the company will provide the services which were negotiated, and will assume any liability for debts, broken promises, or failures to complete the terms written in the contracts.
Surety bonds are common with small businesses that win contracts.
The responsible party provides the customers with the assurance that the work will be completed as stated and on the date specified in the contracts. In this case, the bondholder must secure other means to ensure that the company is not in default.
This means hiring another contractor, or subcontractors.
What Can They Cover?
The surety bond can cover the performance of covered work that is not completed to the satisfaction of a contract.
For example, if a contractor accepts a job, and the contractor fails to do the work, the surety company will either need to hire another contractor to complete the work or reimburse the client for any or all financial losses due to a faulty contract.
- Unobtained licenses or permits
- Failure to complete or deliver as promised
- Contractor not meeting deadlines or stopping working on a project
- Failure to meet specific state standards of required regulations
What Do They Not Cover?
A surety bond is not insurance.
For example, if a subcontractor has an issue with the surety company, the contractor that hired the subcontractor must reimburse the surety company for any damages that were paid out. It is important to determine whether a subcontractor is required in some instances.
In most cases, it might be necessary and beneficial to contract a subcontractor. However, be sure to research the risk involved.
What Are the Limits on them?
Surety bonds are issued on aggregate terms with specific cut off-limits.
For instance, if a contractor has an estimated $2 million job limit, and the aggregate is $8 million, then the contractor can have eight $1 million bonds, or (16) $500 hundred-thousand active bonds at once.
Types of Surety Bonds
No one bond form is appropriate for all circumstances that require a bond. Just as no one insurance policy provides all the insurance coverages that may be required. There are many different types of Surety Bonds, yet in spite of their numbers, Surety Bonds can be grouped into categories. Generally, they are broken into six classes:
- Contract Bond
- License and Permit Bond
- Public Official Bond
- Judicial Bond
- Federal Bond
- Miscellaneous Bond
guarantees the fulfillment of contract obligations. This contract can involve both construction and other type of work or service. Four bonds fall into these classes.
- Bid Bond guarantees an owner that a party bidding for a contract will, if the bid is accepted, enter into the contract.
- Performance Bond guarantees the owner that the job will be completed according to contract specifications and within a specific time.
- Payment Bond or “Labor and Materials” guarantees that labor and material invoices will be paid when due.
- Maintenance Bond guarantees that a principal’s faulty work will be corrected or defective materials will be replaced.
License and Permit Bond
Licens and permit bonds are commonly required to obtain license from cities, towns, or political subdivisions before the license can proceed.
Public Official Bond
Public Official Bonds are required under statue for individuals elected to positions of public office, guaranteeing the public servant will faithfully perform their duties.
Judicial Bonds are used for a variety of court proceedings, guaranteeing a person or firm – as the principal – will fulfill certain obligations specified by statue. There are two classes depending on the type of court action:
- Fiduciary bond
- Court Bond is required by courts of equity to settle arguments involving specific performance. The purpose is to protect persons (Obligees) against loss in the event principals don’t prove they are entitled to remedy.
Federal Bonds guarantee that specific acts will be performed or that obligations will be met with respect to the federal government and its laws and regulations.
Miscellaneous Surety Bond
Miscellaneous Surety Bonds include all those that can’t be classified into any other particular group. This is the largest number of different type bonds: auctioneer bond, insurance agent, school teacher, patent infringement bonds, and others.
Getting the Right Surety Bond
With a strong background in commercial insurance policies, we represent carriers that are ready to provide whatever bond you need. Some carriers want to see a great deal of bond activity while other carriers are satisfied with one or two bonds a year and have less restrictive requirements.
Carriers need a lot of information to set up a bond line, so you establish a bond limit before you need it. Depending on the bond requirements, a carrier may require audited financials from the business and personal financial statements on the owners.
Carriers vary and, depending on the bond, will accept either reviewed financial statements or accountant prepared. We have the markets, knowledge, and expertise to handle your bonding needs. We issue directly from our office.