Surety Bonds: What And Why?

Posted on: 30 November 2017

Surety bond companies come in when two parties require extra security to ensure that an agreement is carried out properly. They are common practice in many industries, especially construction. If you need a surety bond, you need to know what they are and when they are used. 

What are Surety Bonds?

A surety bond is an agreement between three parties: the obligee, the principal, and the surety. 

  • obligee- the entity who hires the principal for a job
  • principal- person or company performing the service
  • surety- the entity ensuring the principal will perform their obligations

The obligee requests that the principal acquire a surety bond. The bond is similar to insurance or a line of credit. If the principal cannot perform the task, the surety covers the costs. The surety will then have to acquire the funds from the principal. The surety will only back a principal that they believe will complete the work properly, though. 

There are commercial surety bonds and contract surety bonds. Contract surety bonds consist of the bid, the requirements, and the payment. They are significantly harder to get than commercial bonds because they are typically used for jobs over $250,000 and often required when working with government entities.

Possible Reasons for a Surety Bond

Surety bonds are not only for construction. Reasons that someone might need a surety bond include:

  • contract bonds

These are the most common bonds. They are usually used in construction to ensure that the job is completed (bid bonds) and suppliers get paid (payment bonds). 

  • license and permit bonds 

Some fields require you to get a bond before you can work. You may need to get a private investigator bond, a motor vehicle dealer bond, a mortgage bond, or a collection bond. These bonds are relatively easy to get as long as you meet the requirements. 

  • legal proceedings

The court can request a cost bond, indemnity to sheriff bond, or replevin bond. The court usually makes the principal put down collateral to obtain the bond. 

  • protect commercial assets

You can get a fidelity bond to add extra insurance on your commercial assets in regards to internal theft, fraud, and embezzlement. 

Cost to Acquire a Surety Bond

It costs .5 - 3% of the amount of the contract to acquire a surety. The principal will include the cost of the surety in the bid that they give the obligee as an additional line item. 

Contact a company like Service Insurance Company for more information and assistance. 

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