What is a Surety Bond?

What is a Surety Bond?



bond A surety bond is simply a contract between three individual parties. It is, in essence, a financial guarantee by one party, known as the surety, to another party, know as the obligee, that a third party, known as the principal, will fulfill a predefined set of responsibilities to the obligee, and that all of the state, federal, and local laws and applicable regulations will be observed. Let’s look at each of the three parties.



 Principal - This is the organization owner that is required to present the bond. This might involve a particular project (as is the case in surety companies or it might be a stipulation for doing business in a specific state (as is the case with commercial surety bonds).



 Obligee - (pronounced ob-li-jee) This party is the one wanting the surety bond to begin with. In the case of a construction project, this would be the project owner. For commercial bonds, this is typically a municipality such as state, county, city, with states being the most common type of obilgee in commercial surety bonds.

 

 Surety - The surety is typically an insurance company that will issue the surety bond to the in exchange for a premium payment, which is much like a standard insurance premium. They are most concerned with determining the risk associated with the agreement. Credit worthiness of the principal is one of the main factors they use when determining the risk, and thus the premium.



A Common Question: Who Needs Surety Bonds?



While the most popular class of surety bond is utilized for construction, there are numerous types of surety bonds that you can acquire for a large variety of business and industries such as healthcare suppliers, mortgage and insurance brokers, auto dealers, health and fitness center owners, Notaries Public and more. Surety bonds can be a critical part of the success of any business owner as they help protect public and private investments by providing a secure foundation.



A surety bond is not really a form of insurance, but rather a financial guarantee or form of credit. A bond type is defined by what it guarantees, but essentially all bonds warrant the fulfillment of a legal obligation between three parties and are designed to protect these parties from monetary loss. Additionally, businesses and industries acquire surety bonds to guarantee their clients are protected in the event of contractual difficulties or default. If a valid claim is made, the surety company will either reimburse the client or make good on the contract.



Obtaining a Surety Bond



In addition to insurance companies, there are also bond contract surety bonds who specialize in furnishing surety bonds. These companies use a very thorough process to analyze the applicant’s business operations, credit history, financial strength, experience, equipment, procedures, work performance, references, reputation and more.



Many factors affect the cost of the surety bond, but applicants with extremely good credit will discover bond rates to be competitive whereas applicants with bad credit may have to consider paying higher rates for high risk bonds. In addition, applicants will have to offer an equity source as a form of guarantee for the bond in which they are applying.