What is a Surety Bond?
A surety is an organization or can be a person that assumes the responsibility of paying the debts in case the debtor policy is unable to make the payments. A surety bond is defined as a three-party agreement that lawfully binds together-
1. The principal who buys the bond to guarantee the quality of work to be done in the future. This can be any business owner or other professional.
- The obligee that requires the principal to purchase a bond to avoid potential financial loss. This is generally a government entity.
- The surety that issues the bond and financially guarantees the principal’s capacity to perform a specific task. These are surety bond companies.
A surety is definitely not an insurance policy. The amount paid to the surety company is for the bond, but the principal is still liable for the debt. The surety is only required to relieve the obligee of the time and resources that will be used to recover losses from the principal. The claim amount is still retrieved from the principal either via collateral or through some other means. Also, a surety is not a bank guarantee. The surety is only liable for any performance risk posed by the principal, while the bank guarantee is liable for the financial risk of the contracted project.
Now after understanding “What is a Surety Bond?” , Let us look at their types.
There are multiple types of surety bonds. The fact is, almost any contract or obligation can be bonded. The most common include contract surety bonds, commercial surety bonds, court surety bonds, and fidelity surety bonds. Each one of these financially protects an obligee across an array of potential scenarios.
1. Contract Surety Bond: This bond guarantees that a contractor will follow the specifications laid out in any construction project. The obligee of a contract surety bond is a project owner and the bond ensures that the principal contractor will perform the tasks contracted upon and pay for the required subcontractors, materials and supplies.
2. Commercial Surety Bond: This type is used to protect public interests and is typically mandated by government agencies. These government agencies will require that all new businesses that require to be licensed in some specific sector should get a commercial surety bond. For these types of bonds, the obligee is always the public.
3. Fidelity Surety Bond: This secures company against the malpractice of an employee who handles cash and other valuable assets. That means this bond ensures protection against the loss of a customer’s money or any other personal belonging. This can also safeguard the company from financial loss due to the fraudulent activity of an employee.
4. Court Surety Bond: This is only required by an attorney or similar entity before a court proceeding to ascertain protection from a possible loss. These bonds typically guarantee the payment of costs associated with lawyer fees. Also, these protect an estate against malpractice of the estate’s administrator.
