What Is a Surety Bond?

Surety bonds are legally binding contracts between three parties. It is a promise to be liable for the debt, default, or failure of another. One party (the surety) guarantees the performance or obligations of the second party  (the principal) to the third party (the obligee). In essence, a surety bond is used to ensure government contracts are completed, to cover losses arising from a court case, or to protect a company from employee dishonesty.

What You Should Know About Surety Bonds

What is a surety bond?

Surety bonds are a promise by a surety company to pay a first-party if the second party fails to meet its obligations. It involves:

• The principal – The person who must make good on an obligation
• The obligee – The person who needs a guarantee that the principal will perform
• The surety – The issuer of the surety bond guaranteeing that the principal will meet its obligation

Surety bonds also help principals, who are most often small contractors, to compete for contracts by reassuring customers that they will receive the product or service as promised.

In order to obtain a surety bond, the principal pays a premium to the surety, typically an insurance company.

What are the different types of surety bonds?

There are many different bonds available, depending on the industry and needs. Generally, there are two broad categories – contract surety bonds and commercial surety bonds.

• Contract surety bonds are written for construction projects. The obligee (the project owner) will seek a principal (the contractor) to fulfill a contract. The contractor will then obtain a surety bond through a surety bond producer. This means that if the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for any financial loss incurred.
• Commercial surety bonds cover a wide range of surety bonds that guarantee performance by the principal of the obligation or undertaking described in the bond. In various situations, they may be required of individuals and businesses by the federal, state, and local governments.

Reasons to buy a surety bond

A surety bond is required:

1. For a construction project

A contractor might need any of these surety bonds before entering into a construction contract:

• Performance bonds
• Payment bonds
• Bid bonds

Every contract bond guarantees a different action. For example, payment bonds ensure all subcontractors and suppliers are paid for their work whereas, bid bonds assure the contractor will follow through on a contract they bid on.

2. To get licensed

Some industries need a surety bond to get a license. Some license and permit bonds include:

• Private investigator bonds
• Motor vehicle dealer bonds
• Collection bonds
• Mortgage bonds
• Contractor license bonds

These bonds ensure you will ethically and faithfully accomplish your business practices. Most importantly, you should follow the rules of your profession. Otherwise, someone can file a claim against your bond.

3. To protect your business

A fidelity bond is required to protect your business from fraudulent activities, theft, and embezzlement from your employees that are otherwise not covered by standard insurance.

Common fidelity bonds include:

• Employee theft and dishonesty bonds
• ERISA (Employee Retirement Income Security Act) Bonds
• Business Service Bonds

These bonds either provide coverage for all employees or some employees.

4. For a court proceeding

The court might require you to get any of these court bonds before proceeding with your case

• Indemnity to sheriff bonds

• Replevin Bonds
• Cost bonds

These bonds protect against all possible losses resulting from a court proceeding.

Ready to find the right surety bond? Contact the team at Northeastern Group Ltd. to get started. We serve New York, New Jersey, Connecticut, Pennsylvania, Georgia, and Florida.