Definition and Purpose of Surety Bond
A surety bond is a tripartite agreement under which a principal firm is assured of the complete performance of its obligations towards an obligee. Whenever a principal fails to comply with any contractual, statutory, or regulation obligations, the surety shall compensate the obligee for losses incurred. In surety, it is mandatory for a principal to reimburse the surety for any claims paid, which is a distinct characteristic from insurance. Construction contracts, business licensing, and court proceedings are some areas where surety bonds are needed; they are intended to ensure protection not only for public interests but also for private interests. They ensure compliance, financial accountability, and ethical conduct in business. Such kinds include license bonds, contract bonds, and court bonds, serving different purposes in different industries.
Surety Bond Between Three Parties
- Principal – The person or business required to secure the bond.
- Surety – The company in question that provides the bond.
- Obligee – The body that requires the bond, which is typically a government agency or client. It otherwise assumes that he shall carry out his plans. If he does not, then the obligee makes a claim against the surety for payment. The principal must make the payment to the surety according to the indemnity agreement.
Why Surety Bonds Will Be Necessary?
The governments and public are protected in surety bonds from any financial waste caused by his negligence, bad construction, or failure to pay contractors or suppliers. If a failure of conditions occurs on any of the bonds, then claims can be put against it. Learn more about how surety bonds provide protection and the process for filing claims.
Do You Actually Need To Get A Surety Bond?
A bond is only required in case of statutory or contractual requirements; it varies from state to state and industry to industry. Common applications include:
- Construction (e.g., performance and payment bonds).
- Licenses (auto dealership and freight broker bonds).
- Court Orders (judicial and probate bonds).
A payment bond is mandatory under federal law for all public projects in excess of $35,000, and such bonds guarantee that subcontractors and suppliers will be paid.
Types of Surety Bonds
License & Permit bonds: Ensure the legal operating of professionals such as contractors and auto dealers.
Examples of contractor bonds refer to bonds applicable in public construction such as bid, performance and maintenance bonds.
Certain legal proceedings, such as probate or judicial, require court bonds.
Steps for Getting a Surety Bond
The process of obtaining a bond is not complex:
- Application: Apply to a surety company.
- Underwriting: On the basis of your credit status, finances and credit history, the company will evaluate your risks.
- Approval & Quote: Once accepted, a quote and indemnity agreement will be issued.
- Payment: Bond issued by email and original copy sent by mail after payment.
Example of a Surety Bond
To get a state license in Georgia, a general contractor requires a surety bond of $25,000.
- Determine the Requirement-The contractor must have a bond because he must do legal work on projects over $2,500.
- Get a Bond-Applying, passing underwriting, and paying 2 percent on the bond ($500) as a premium.
- Claim Process-A client files a claim after six months for defective work. The surety pays the client, but the contractor must reimburse the surety in full.
