A surety bond is a type of financial agreement that ensures a person or business will fulfill their promises. It is not the same as insurance, even though it offers some protection. A surety bond is an agreement involving three parties:
- Principal – The person or business required to follow the rules or complete a project.
- Obligee – The party that requires the bond, such as a government agency or company.
- Surety – The financial company that guarantees the principal will meet their obligations.
How Surety Bonds Work
When an obligee requires a bond, the principal must buy one from a surety company. The surety will review the principal’s financial history to see if they are reliable. If approved, the principal will pay a fee for the bond.
For example, imagine a construction company is hired to build a road for the government. The government (obligee) wants a surety bond to ensure the company completes the project. The construction company (principal) buys a bond from a surety company. If the company fails to finish the road, the surety will step in to complete it or compensate the government. The construction company must then repay the surety for the costs.
What Happens If the Contract Is Not Fulfilled?
If a principal does not meet the terms of the bond, the obligee can file a claim. The surety will investigate the claim. If it is valid, the surety will pay the obligee. The principal must then repay the surety for the amount covered. Check this out to learn more about the claim process and how surety bonds work.
Surety bonds usually last one to three years or until the contract is complete. Sometimes, the bond period is extended to ensure all conditions are met.
How to Get a Surety Bond
To find out what type of bond you need, ask the organization requiring it. Bond requirements vary depending on the industry and location.
To apply for a bond, you usually need to provide:
- Financial statements (personal and business)
- Resumes of key employees
- Business references
Each surety company may have different requirements. Providing the right documents helps prove that you are responsible and capable of fulfilling the bond’s terms.
Surety Bonds vs. Insurance
- A surety bond guarantees that a principal will meet their obligation. The principal repays the surety if a claim is paid.
- Insurance protects the policyholder from financial losses without requiring repayment.
- Surety bonds involve a one-time payment, while insurance usually requires monthly payments.
Types of Surety Bonds
- Contract Bonds – Used in construction to ensure projects are completed.
- Commercial Bonds – Required for businesses to follow laws and regulations.
- Court Bonds – Protect people involved in lawsuits from financial harm.
- Fidelity Bonds – Protect businesses from losses caused by employee fraud.
Who Needs Surety Bonds?
Many professionals and businesses need surety bonds, such as:
- Businesses applying for licenses
- Construction companies working on government projects
Surety bonds help build trust and ensure that businesses follow the law. If you need one, consult a surety company to understand the requirements and costs.
