Surety bonds are three-party agreements that are legally binding. The parties involved are the principal, the obligee, and the surety company. For example, a local authority that wants to construct a building will hire contractor X. The government requires contactor X to have a construction performance bond as a promise that they will adhere to the terms in the contract. Contractor X will, therefore, buy surety bonds from a trusted surety company. If the contractor fails to fulfill his or her obligation as per the contract, the surety company will compensate the local authority.
The entity which the bond protects, i.e., the project owner or investor (local authority), is called the obligee. The contractor (contractor X) is known as the principal, and the company which issues and backs the bond is called the surety company.
Note that there are surety bonds which you must take to comply with the law, for instance, if you are carrying out large government or commercial projects. Some private project owners may also require you to take a surety bond. There are four major types of surety bonds. These are a contract, commercial, fidelity, and court surety bonds. Below are the details of each of these.
Contract surety bond
A contract bond guarantees that a hired contractor will perform their duties as outlined in the agreement. Some of the expectations of a contractor include completing a task in time and making timely payments to laborers. Contract surety bonds are common for large construction companies with several projects, general, individual and trade contractors, and federal government contractors with projects of $100k.
Contract surety bonds can cost between 1% and 15% of the bonded amount. The higher your credit score, the lower the premiums you will pay. Other factors that affect the number of premium payments are the financial performance, credit limit, and industry experience. There are also several types of contract bonds, including bid bonds, performance bonds, maintenance bonds, and payment bonds.
Commercial surety bond
Government entities require this kind of bond for all businesses operating with a license. It ensures that businesses operate within set codes of conduct and regulation. These bonds protect the general public who interact with a bonded principal. The public well-being is, therefore, the obligee and they can file a claim against the bonded organization or person for damages.
Commercial bonds are common among licensed contractors, liquor sellers and distributors, businesses that deal with lottery tickets, auto-dealers, notary publics, and a wide range of professionals who require a government license. These types of bonds include airline reporting bonds, appraisal management company bond, auctioneer bond, auto dealer bond, collection agency bond, credit energy organization bond, energy broker bond, insurance broker bond, to mention a few.
Fidelity surety bond
A fidelity surety bond protects a company against any employee malpractice such as theft or dishonesty. These bonds suit companies with employees who handle lots of money or valuable assets. The principal is the company, and the obligee can be either the company or its customers.
Fidelity surety bonds are not a requirement. There are several other businesses that can benefit from the surety bond. These include those that hire seasonal employees, especially mass hires and businesses whose employees make home visits. These types of companies include brokerages, delivery services, restaurants, brick and mortar shops that deal with cash, cash carriers, among others.
Court surety bond
Court surety bonds, also known as judicial surety bonds, protect a person from potential losses due to a court proceeding. Plaintiffs and defendants use these kinds of bonds in court. These bonds are of two categories. These are defendant and plaintiff bonds.
A defendant may benefit from bail or appeal surety bonds. It is a requirement for plaintiffs to take a court surety bond to protect the defendant financially if the plaintiff loses the case. Due are liable for any losses that a defendant suffers during the court proceedings. One type of court surety bond is a cost bond which guarantees payment of court costs during an appeal.
Each of the above bonds protects the obligee from any harmful business practices. Some are a legal requirement while others, even though not required, are safe to have.
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