Unlike insurance policies that have financial repercussions for the insured if there are losses, surety bonds put the economic risk on the principal. This makes them less expensive for businesses that need to comply with regulations.
Typically, these businesses purchase surety bonds to satisfy contractual obligations set by an obligee. They also pledge their company and personal assets to serve as indemnity in the case of a claim against them.
What is a Surety Bond?
A surety bond is a three-party agreement that guarantees certain obligations will be fulfilled. Unlike insurance, which involves a two-party agreement between the policyholder and the insurance company that reimburses the policyholder for covered losses, surety bonds involve an obligee, a principal, and a third party known as a surety company.
The surety company essentially extends credit to the principal, and like a bank loan, the principal must sign indemnity construction bonds in California that guarantee they will pay back the surety company for any claims paid out on their behalf.
Hundreds of different types of surety bonds exist, covering a huge number of business and governmental needs. For instance, many people are required to post a license and permit bond as part of the process of getting licensed to work in a particular industry. Likewise, some courts require bonds to ensure that parties involved in legal proceedings will fulfill their responsibilities.
To secure a surety bond, the person or business required to do so must complete an application with a surety company. This application usually includes information about the business, its owners and their personal financials. This information is used to underwrite the bond, ensuring that the surety will be reimbursed in case of a claim. To lower the cost of the bond, it is common for applicants to provide collateral or co-signers.
What is an Obligee?
The obligee is the party requiring the bond, such as a government agency that hires a contractor for a project. The obligee can file a claim against the bonded contractor if they feel that the bonded contractor did not complete the project within the agreed upon time frame or upheld the duties and responsibilities set forth in the contract.
A claim against a bonded principal may result in monetary compensation for the obligee, up to the bond’s coverage amount. However, the principal is responsible for funds expended on settling a claim. Just like with insurance policies, a bonded principal must make every effort to avoid claims.
Most bonds are required by law or in order to do business, such as contractor license and permit bonds needed to operate a small business. However, some bonds can be purchased voluntarily in order to demonstrate financial responsibility.
A surety bond guarantees that specific obligations will be met. If you are unsure about what type of bond you need or how to proceed, contact a reputable surety agency such as Viking Bond Service to assist you. The goal is to secure the proper bond that meets your needs while keeping costs as low as possible. This ensures that you are covered should a claim occur. It also helps you to maintain the highest credit rating possible, ensuring that you have the ability to obtain future bonds if necessary.
What is a Principal?
A principal is a person or business required to furnish a surety bond. If you are notified that you or your business is required to obtain a certain type of surety bond, it’s important to understand why you need one and what happens if you do not comply with the required regulations.
Often, bonds are a requirement to participate in a specific endeavor. For example, construction companies may need to be bonded in order to secure government contracts. Other businesses, such as auto dealerships and liquor stores, might be bonded as part of their licensing requirements.
Each bond is unique and typically provides a financial guarantee to the obligee that the principal will fulfill their obligations under the contract. These obligations could include compliance with state laws and regulations pertaining to a specific business license, or meeting the terms of a construction contract. If the obligee feels that the principal does not meet their obligation under the bond, they can file a claim with the surety company. The surety company will then pay reparation up to, but not exceeding, the amount of the bond.
Unlike other forms of security, such as collateral, a surety bond does not require the principal to put up any assets that can be directly accessed in a situation requiring a claim. This frees up resources for the business, which can be put to use in other areas of the operation.
What is a Surety Company?
Depending on the type of surety bond, there are a variety of different companies that can write these agreements. Each company is unique and will have its own process in place for evaluating applicants, providing quotes, and establishing an account. Each bond is a legally binding contract between three parties-the obligee, the principal, and the surety. A common example is a government agency hiring a construction company and asking the contractor to guarantee that work will be completed in a specific time frame. In this case the obligatee is the agency, the principal is the contractor, and the surety is the third party that writes the bond.
A common misconception is that a surety bond acts like insurance but it’s important to understand the difference between them. While insurance policies cover a broad range of perils, surety bonds are a more specific financial guarantee against certain obligations. They are also often required for licensing, permitting, and even court proceedings.
Unlike an insurance policy, the parties involved in a surety bond relationship expect losses to be recovered through the claims process. This is because the funds expended by a surety to settle a claim must be repaid by the principal. For this reason, it is important for principals to consider the risks associated with being bonded before deciding whether to pursue it or not.