A surety bond is a type of agreement that ensures one party will meet its obligations. It is commonly used in industries like construction, finance, and legal matters to provide financial security and guarantee that contracts are fulfilled. Get started today by learning more about how surety bonds can benefit your business.
How Surety Bonds Work
Surety bonds involve three parties:
Principal – The person or company required to perform a task or fulfil a contract.
Obligee – The party that requires the bond and benefits from its protection.
Surety – The company that provides the bond and guarantees that the principal will meet its obligations.
If the principal fails to meet the terms of the contract, the obligee can file a claim with the surety company. After reviewing the claim, the surety will compensate the obligee.
Types of Surety Bonds
Commercial Bonds – These bonds are required for businesses providing professional services. They ensure that contractors, suppliers, or service providers fulfil their obligations.
Construction Bonds – These are essential for construction projects. They guarantee that contractors complete their work properly. Some common types of construction bonds include:
Bid Bonds – Ensure that a contractor follows through after winning a project bid.
Performance Bonds – Guarantee that the contractor completes the project as per the contract.
Court Bonds – These bonds are sometimes required in legal cases. Examples include:
Bail Bonds – Ensures the appearance of the defendant in court.
Cost Bonds – Cover legal expenses in certain cases.
Fidelity Bonds – These protect businesses from financial losses due to dishonest employees or fraud. Some common types include:
Crime Bonds – Cover theft or fraud by employees.
Business Service Bonds – Protect businesses if employees steal or damage property while working for clients.
Financial Institution Bonds – Protect banks and financial institutions from fraud.
Surety Bonds vs. Insurance
Although surety bonds and insurance seem similar, they have key differences.
Insurance protects the policyholder against losses. The risk is transferred to the insurance company.
Surety Bonds protect a third party (the obligee) instead of the policyholder (the principal). The principal remains responsible for repaying the surety company if a claim is made.
When Are Surety Bonds Required?
A surety bond may be necessary in several situations:
Obtaining a Business License – Many industries require companies to have surety bonds before they can operate.
Starting a Construction Project – Contractors must often secure bonds before beginning work.
Court Cases – A court may require a bond to ensure financial responsibility.
Protecting a Business – Businesses use fidelity bonds to guard against employee theft or fraud.
How to Get a Surety Bond
The process of obtaining a surety bond includes:
Application – The applicant provides information about themselves and their business.
Evaluation – The surety company assesses the applicant’s credit history, financial stability, and experience with surety bonds.
Quote – The company provides a price for the bond.
Signing an Agreement – The applicant agrees to the terms and conditions of the bond.
Payment – The applicant pays a percentage of the total bond amount, often through a payment plan.
Surety bonds provide security in many industries, helping businesses, governments, and individuals ensure that contracts are fulfilled and obligations are met.