What is a Surety Bond?
Formal Definition: A surety bond is a three party guarantee put in place to protect the party requesting the bond. The three parties involved are:
The Obligee: The party requiring the Bond
The Principal: The party required to get the bond, and perform the guarantee.
The Surety: The backer of the bond
Ok, now that that’s settled, what’s a surety bond really mean to me?
As stated above, a surety bond is a three party agreement that guarantee’s something. What it’s guaranteeing depends on what type of business you are in, or why you are being required to obtain a bond. There are three major categories of surety bonds, let’s look at each for an example:
- Commercial Bonds: The vast majority of the bonds out there falls under the license and permit surety bond type. This includes businesses such as Auto Dealers, Collection Agencies, Mortgage Brokers and Telemarketers to name a few. These bonds are used to guarantee that the individuals or businesses abide by the rules and regulations of their business license.
- Contract Bonds: Typically used for construction work, these bonds guarantee that the job will be completed as per the terms of the contract. Bid, Performance, and Payment Bonds all fall under the category of Contract bonds.
- Court Bonds: The most common Court Bonds we see deal with an estate or guardianship situation. These bonds typically guarantee to the court that any money will be used appropriately.
That’s three different categories of surety bonds, but all common in the fact that they guarantee something.
How Do Surety Bonds Work?
Is a Surety Bond Insurance?
New Clients often comment that this process feels a lot like insurance: Pay a premium, get coverage for a term (typically a year) in case something goes wrong (a claim is filed against your bond). So isn’t a surety bond just insurance?
No, there is a major difference between the two. When you crash your car and file a claim, you pay a deductible, and worse case your rates may go up in following years. With your bond, if a claim is filed, the surety has the right to: 1) look to you for repayment of any loses, and 2) cancel your bond. It is for this reason it is better to view your bond as a line of credit, rather then insurance.