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What Does A Surety Bond Mean?

What Does A Surety Bond Mean

A surety bond can be said to be an agreement between three parties that legally binds them together. The parties involved include the principal who usually is the person in need of the bond, a surety company that is selling the bond, and the obligee that needs the bond. This bond is supposed to guarantee that the principal is going to act in a specific way and following the given laws.

In any case, the principal does not follow the laws provided; the bond will cover for any resulting losses or damages. Even though they are not easily noticed, these surety bonds play a crucial role in several industries in the United States.

To get a surety bond, the principal has to pay a premium to a company, which is usually a surety. On many occasions, you will find that the obligees are government agencies. However, even professionals and commercial parties make use of these bonds regularly. The principal is required to pen his signature on an indemnity agreement. The agreement pledges personal or company assets that will be used to reimburse the surety in any case a claim occurs. In any case, the assets are not able to fully cover the complaint; the bond will have to pay its own money.

Categories of Surety Bonds

There are distinct types of surety bonds that usually address different situations. However, some have the same characteristics:

  • Working capital: Principals should have an amount of working capital according to sureties, which are 10 percent of the bonded amount.
  • Bond premium: 1% – 15% fee of the total amount bonded will be charged, and it is supposed to be paid by the principal on an annual basis.
  • Bonded amount: The bonded amount in sureties usually is ten to 15 times the business equity for the principal. That is typically the amount invested in that business plus the retained earnings.
  • Bonding capital: This is usually the maximum amount that a principal can get that was bonded.
  • Bond term: Usually, a surety bond takes one to four years. Some are, however, perpetual and do not have an expiry date.

Contract Surety Bond

It is a type of surety bond used to guarantee the high performance of a contractor. The contractor is usually the principle in this type of bond. The bond protects the project owner, and obligee from any severe business conducts and probably a failure on the part of the contractor.

Several factors will affect the bond premium, and they include industry experience, existing credit, and contractor’s financial performance. A contract surety bond can consist of:

  • Payment bond: These bonds guarantee that the contractor will remunerate the subcontractors, material suppliers, and laborers just as the contract dictates. It is mostly applicable to commercial and federal construction projects.
  • Bid bond: This type of bond will guarantee that the contractor will be able to satisfy the specifications in the bids submitted and that the contractor cannot back out in case they win a bid.
  • Performance bond: this bond will protect the obligee in case a contractor does not satisfactorily complete the project as per the agreement.
  • Maintenance bond: these bonds will shield the owner of the project from losses that may occur due to faulty materials or defective artistry.

Final Thoughts

These bonds are insurance policies. They are rendered by insurance companies that may be general-purpose insurers or specialized for a particular product. Be aware that if the principal does not live up to expectations, then the obligee can launch a claim, and if found valid, the insurance will reimburse the amount but not more than the bond amount.        

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