A surety bond is basically a contract between three individual parties. It is, in essence, a financial warrant by one party, known as the surety, to another party, know as the obligee, that a third party, known as the principal, will complete a predefined set of obligations to the obligee, and that all of the state, federal, and local laws and applicable regulations will be followed. Let’s look at each of the three parties.
Principal - This is the business owner that is required to provide the bond. This might involve a specific project (as is the case in contract surety bonds) 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 popular 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.
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 Standard Question: Who Needs Surety Bonds?
While the most popular form of surety bond is used for construction, there are numerous types of surety bonds available for a large assortment of business and industries such as medical suppliers, lending and insurance brokers, auto dealers, health spa owners, Notaries Public and more. Surety bonds can be a critical part of the success of any business owner as they help safeguard public and private investments by providing a secure foundation.
A surety bond is not necessarily a form of insurance, but rather a financial warrant or form of credit. A bond type is defined by what it guarantees, but essentially all bonds guarantee the fulfillment of a legal written agreement 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 problems or defaulting. 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 surety companies who specialize in furnishing surety bonds. These companies use a very detailed process to analyze the applicant’s business operations, credit history, financial strength, experience, equipment, management, work performance, references, character and more.
Many factors affect the cost of the surety bond, but applicants with excellent credit will discover bond rates to be affordable whereas applicants with bad credit may have to consider paying more costly rates for high risk bonds. Likewise, applicants will have to offer a collateral source as a form of guarantee for the bond in which they are requesting.
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