What is a Surety Bond?
A surety bond is simply an agreement between three separate parties. It is, in effect, a financial guarantee by one party, known as the surety, to a different party, know as the obligee, that a third party, known as the principal, will complete a predefined set of responsibilities to the obligee, and that all of the state, federal, and local laws and applicable regulations will be observed. Let’s look at each of the three parties.
Principal - This is the business owner that is required to present the bond. This might involve a particular project (as is the case in bond contract surety bonds or it might be a provision for doing business in a particular state (as is the case with commercial surety bonds).
Obligee - (pronounced ob-li-jee) This party is the one requiring the surety bond to begin with. In the case of a construction project, this would be the project owner. For commercial bonds, this is typically a municipality such as state, county, city, with states being the most common type of obilgee in commercial surety bonds.
Surety - The surety is typically an insurance company that will issue the surety bond to the in exchange for a premium payment, which is much like a standard insurance premium. They are most concerned with determining the risk associated with the agreement. Credit worthiness of the principal is one of the main factors they use when determining the risk, and thus the premium.
A Standard Question: Who Needs Surety Bonds?
While the most popular class of surety bond is utilized for construction, there are many types of surety bonds available for a large assortment of business and fields such as medical suppliers, mortgage and insurance brokers, automotive dealers, health club owners, Notaries Public and more. Surety bonds can be a critical part of the success of any business owner as they help protect public and private investments by providing a secure foundation.
A surety bond is not actually a form of insurance, but rather a financial guarantee or form of credit. A bond type is defined by what it guarantees, but in reality all bonds warrant the fulfillment of a legal written agreement between three parties and are created to protect these parties from financial loss. Additionally, businesses and industries purchase surety bonds to guarantee their customers are protected in the event of contractual difficulties or defaulting. If a legal claim is made, the surety company will either reimburse the customer or make good on the contract.Obtaining a Surety Bond In addition to insurance companies, there are also surety companies who specialize in furnishing surety bonds. These companies use a very thorough process to analyze the applicant’s business operations, credit history, financial strength, experience, equipment, procedures, work performance, references, character and more. Many factors affect the cost of the surety bond, but applicants with extremely good credit will find bond rates to be affordable whereas applicants with poor credit may have to consider paying higher rates for high risk bonds. Additionally, applicants will have to offer a collateral source as a form of security for the bond in which they are requesting.
